Sunday Brunch - yes a day late
We have taken a bit of time out to update the weekly The Sustainable Investor newsletter. Its still about how finance impacts sustainability (and vice versa) - because that is the world I know and understand. We have moved back to a longer weekly, as many people have said "I just don't have time to read whta you write every day, but if you put it all together in one place, I can come back to it through the week, or maybe when I am commuting)" . And, as the title suggests we are moving to publishing on a Sunday (at least from now on).
Think of this as your weekly continuing education in what really matters about sustainability finance.
This week we wrote about (short summaries later in the Newsletter)
Getting financial people to listen - or what matters to them
Understand who your customer is, what they care about - that is the way to think about innovation - David Robertson, MIT Sloan
This might seem a strange way to start a discussion about how sustainability professionals can get finance people to listen. But if you think about it: as a sustainability person who is trying to get the private sector to invest in a more sustainable economy, then the finance world is the 'customer' you need to understand, and in return you want them to deliver financial innovation, ways of delivering both sustainability and a fair financial return.
Now, to be clear, this doesn't mean the financial sector can dodge responsibility. We think there are compelling reasons why they should think differently about sustainability. We will be exploring these, including the concept of a Universal Investor (someone whose financial return comes from the health of the total economy), in a later Sunday Brunch. But for today, it's about how do we sell sustainability messages to financial people. And this is based on 30 years of experience of getting financial people to listen and act.
Not a member yet? Click here , its free.
What gets financial peoples attention?
My professional life has largely been spent persuading financial people to listen: as a corporate finance advisor and banker, as a broker to investment funds, and as an investor: persuading companies to listen and act.
I have found there are broadly five ways that work. And they all have applications to sustainability finance. Today I want to set out the five approaches, and dig into the first three. I will tackle the rest, and how we can lever them all to advance the case of sustainability investing, in a future Sunday Brunch.
The five are profit now, future profit, technological pressure, regulation/social pressure, and the wild card, industry stability.
Profit Now
Take offshoring, when companies move their supply chains and production to another country. This can create an 'out of sight, out of mind' mentality. We can inadvertently end up accepting lower environmental, social and governance standards than we would demand in our home country. The good news here from a sustainability perspective is that the courts are starting to accept that companies are responsible for what happens in their subsidiaries and supply chains. But its still something to watch.
Future Profit
2. No 2 is a variation on No 1. This one is about future profitable markets. You might think this one is obvious as well - after all if something is going to be profitable in the future, then its worth investing in now. Examples of sustainability investments in this group include Wind and Solar electricity generation,?and Electric Vehicles. And while some companies are still dragging their feet, we are already seeing increasing investment in greener solutions.
(Click on the image to read the story)
But, it's not straightforward. Reasons why companies might not invest, despite the opportunities seeming obvious to you & I, mostly revolve around how tough organisational change is to actually deliver. This includes issues of power and influence, plus perceptions of risk. If you are an expert in say Oil & Gas, shifting your company to Renewables could massively erode your own power base. Plus some companies are organisationally very risk averse, electricity utilities are a good example of this.
And we have some real questions about how willing consumers (both retail and business) are to actually pay (the premium) for more sustainable products. This is already being tested with green hydrogen and green steel - so something here to look out for. And we need to find financially viable solutions around electric vehicles (up front cost issues) and building heating (again up front costs).
The bottom line is that we should not underestimate how tough change is for an organisation. And how long it can take. Plus, how companies will respond to the uncertainty around 'future' profits, especially when the business model will look very different. This is something all of us need to bear in mind, a point that Dr Darian McBride makes in a recent blog for the Grantham Institute. This is an area where we all need to build expertise.
(Click on the image to read the story)
Technology
3. Next up - technology. Companies are generally good at seeing how technology is going to change their industry, and potentially damage their future sources of financial competitive advantage. Although, as Blockbuster and Nokia showed, even when you know its coming, you can still respond too slowly.
(Click on the image to read the story)
People tend to think about technology as being about IT software, hardware, and automation. And while that plays a role, technology can also be about supply chains and production processes. A good example of this is Zara, the Spanish apparel company. They led the way in local sourcing, at a time when everyone else was outsourcing to China. And they turned it into a material source of competitive advantage, quick turnarounds meant less discounting.
But there is also a sustainability angle. Take the Chemicals industry. Their production processes and supply chains are all built around using fossil fuels as a feedstock. But technologies are gradually emerging that could change that - using green electricity to produce green hydrogen. Given that a chemical companies competitive advantage is largely built around being good at fossil fuel based production processes, these new technologies could become a massive problem for the incumbents. The solution - start learning about these new production processes now, even if you don't expect them to be mainstream for five to ten years. Putting it in a financial way - invest now to build future competitive advantage.
(Click on the image to read the story)
Round up - its about how we communicate
In most cases communicating the need to act on sustainability to financial people 'just' requires us to think in a different way, to see things from their perspective.
In the next Sunday Brunch on this topic, I will tackle the two hardest drivers of change for financial organisations, regulation/social pressure and industry stability.
In the meantime, this blog on Sustainability and the need for financial markets to think Long Term, is also worth a read.?
And yes, you guessed it (Click on the image to read the story)
领英推荐
Bridging the Gap
In case you missed it ...
Here is a selection of recently published long blogs, Perspectives and Quick Insights that our subscribers get to read in full.
But first a couple of things that caught our eye this week...
What caught our eye this week
Cyber threat to critical infrastructure
An article this week with claims from western intelligence agencies and Microsoft that?Chinese state-sponsored hackers have carried out one of the largest cyber-espionage attacks on a range of US critical infrastructure ?from transportation hubs to telecommunications and included Guam which has a number of US military bases. The US National Security Agency (NSA) is reportedly working with its international partners, including Australia, New Zealand, Canada and the UK, to identify the breaches and determine how many organisations were affected. China dismissed the allegations as a “collective disinformation campaign” by the so-called 'Five Eyes' countries.
In April we wrote about general risks to critical infrastructure, such as our electricity systems, particularly as the electricity grid evolves to become 'smarter'. Smart grids can make the system more responsive and reliable, enable the addition of more renewable generation, and contribute to reducing costs. But they also bring risks. They can make the systems more venerable to cyber attack, and with these coming with increasing regularity, this is a topic that everyone in sustainability finance needs to understand.
Link to blog?????
(Greener energy applications, Premium and Professional)
Hybrid drives drop in diesel city bus sales in Europe
Roughly 60 percent of heavy-duty passenger vehicle sales in Europe are city buses. In the first quarter of 2023?more of those sales were battery electric vehicles ?(BEV) than any other type. Interestingly, that was less about a large increase in the sale of BEVs but rather a sharp fall off in the sale of diesel buses as many are starting to be, at least initially, replaced by hybrid vehicles.?Electrifying heavy transport, such as buses, vans, and trucks, is going to be a key part of the decarbonisation of transport, and a major contributor to reducing urban air pollution. We discussed the issues around charging those vehicles in a Deep Dive back in March.
Link to blog?????
(Greener energy applications, Professional)
What subscribers are reading this week
Why relying on the 'diversity tick box' doesn't work
(Transitions / Human rights, Professional)
Research by Edmans, Flammer and Glossner seeks to identify what the determinants are of a workplace environment that promotes and embodies Diversity, Equity and Inclusion (DEI) and then looks at the consequences of that environment on performance (profitability and innovation), valuation and stock returns. They found, for example, that there was a positive association between high DEI and all but one of the eight measures of future profitability studied and a positive link to future earnings surprises. However, they found no evidence of a link between DEI in a firm and its stock returns, all else being equal.
But this isn't what I found most interesting...
They challenge the common view on what DEI actually is. That's a good thing. It means we can focus on the right actions. It means we can design workplace policies and approaches to improve DEI in the workplace. 'Add diversity and stir' misses the point that a firm's culture is not the sum of its parts. It is the weighted average of values that people truly follow.
Link to blog?????
Will Sustainable Aviation Fuel (SAF) make airlines sustainable?
(Greener energy applications, Premium and Professional)
We know that aviation will probably be one of the later major industrial sectors to fully decarbonise. The most financially sensible path for the airline industry is to find a 'drop in' fuel technology, that works in existing jet engines. One that generates lower GHG emissions, making it a good bridging technology for the next decade or maybe a bit more. And then, as aircraft get replaced, they can gradually transition to electric aircraft for short and medium haul, and maybe hydrogen for long haul (the later part of the plan still needs some thought).
Sustainable Aviation Fuel (SAF) looks like the perfect answer. It is a type of biofuel that can currently replace 50% of jet fuel, and 100% replacement looks to be deliverable. Properly produced it massively cuts end-to-end GHG emissions. Yes, it's expensive, but not so expensive that we cannot find solutions.
To produce enough we apparently need to use most of the potential biofuel feedstocks. In addition a lot of other industries are already saying 'biofuels are the answer to our decarbonisation challenge' as well. So, while each solution makes sense on its own, if you add them together, we have a raw material shortfall.
And our politicians are fudging. They are not saying 'this solution has priority', but instead they are pretending ('greenwashing') that we can deliver on all of the solutions. We face some hard decisions. Let's make them informed decisions. Unless aviation gets political priority, SAF looks like it's going to struggle to be a financially viable decarbonisation solution for the aviation industry.
Link to blog?????
Have we been looking at DEI all wrong?
(Transitions / Human rights, Premium and Professional)
Embracing diversity with an equitable mindset aimed at creating an inclusive workplace has been held up as a way of improving performance. Nasdaq rule 5605(f), for example requires companies to "have or explain why it does not have, at least two diverse board members, including at least one who self-identifies as female and at least one who self-identifies as an underrepresented minority (as defined) or LGBTQ+."
Increase board diversity with more female directors, more people of colour or other underrepresented minorities and the benefits are clear - your stock price will go up!
Where is the evidence for that? Research from Edmans, Flammer and Glossner challenges common perceptions about diversity, equity and inclusion (DEI) with the starting point that traditional demographic measures may not even be capturing the level of DEI in a firm accurately. With that as a starting point, actions and outcomes are not as intended.
We may well have been looking at DEI all wrong...
Link to blog?????