What Kind of Sustainable Strategies Make a Difference?

So, why does ESG help you do better business, both operationally and financially? The short and ‘doomy’ answer is that it’s vital for any company because you can’t run a business on a planet that isn’t fit for human life.

However, the longer and cheerier version is that ESG tends to be good for business because it gives you new, relevant ways to measure your business performance – not just the thin yardstick of dollar bills. You can gain a more complete understanding of the real cost basis of your business – including previously invisible costs to the natural world or human wellbeing.

You can have more motivated and purposeful employees. You can avoid the PR disasters which await the unwary and the cynical. You can earn the trust of your customers, suppliers, investors and regulators. You can even find that necessity is the mother of invention – creating a culture of innovation and differentiating your business in your sector.

But, even if you only look at current market trends and short-term financial indicators, there’s good reason to take sustainability seriously. In 2019, a $10 trillion investor alliance called on 700 major companies to disclose their environmental risks.

In tandem, science-based corporate pledges – in which companies develop genuine plans to get to net zero – are rising. And, as we’ve seen on the streets, more people are talking about how environmental issues, social justice and business practices intersect.?

It follows that businesses who genuinely grapple with complex ESG questions are better suited to earn people’s trust and their repeat purchases.

In the UK, for instance, annual ethical spending has more than quadrupled (+425%) over the last two decades. It is hard to explain how impressive that figure is. To drive the point home, household spending in the same period only grew by about 2%. That 2% growth versus a 425% growth shows how consumer interest in good businesses is skyrocketing.?

Renewables Remunerate

To get some sense of the radical change at work, it’s worth looking at the powerful world behind your light switch.

As one of the primary causes and most potent solutions to climate change, the energy sector is a great indicator of where ESG trends are heading.

If you had taken your money to the UK stock market five years ago, and invested in clean energy companies, you would be 75% richer today. On the other hand, if you had put your money into fossil fuels, you would have enjoyed 9% growth. That’s not bad. But I’m sure you’d rather have had a 75% return. If you’d done the same in the US, you would have earned a 66% return on renewables.

In contrast, you’d have lost 10% of your money on fossil fuels. Of course, these are general figures. So, to illustrate the point, it’s worth looking at a specific company.

Let’s take the Danish ?rsted, the world’s largest offshore wind developer. Born in the 70s, ?rsted used to be an oil and coal company. They relied so heavily on fossil fuels, the company was responsible for one-third of the Denmark’s total carbon dioxide emissions in the early 2000s.

The company’s leadership made an executive decision in the late 2000s to turn the proverbial ship around. They set an ambitious goal to generate 85% of their energy from renewables within the next thirty years.

10 years down the road the company is already generating 86% of its energy from renewables. Yes, you’ve read that right. The company met its target 20 years ahead of schedule. They also reduced their emissions by 86% since 2006 and carved out a 30% offshore market share.?

Does all that really pay? You bet it does. Since joining the stock market in 2016, ?rsted’s stock prices have?increased by a factor of four. This simply means that if you had bought the company’s stocks during their initial public offering, you would have quadrupled your investment by early 2021.?

Plant Powered People

But renewable energy isn’t the only way to do well by doing good. In theory, shifting to plant-based diets could save an annual 8 billion tonnes of emissions globally by 2050. To understand this figure, it helps to know that 8 billion tonnes of emissions are equal to a seventh of all annual emissions – or two-thirds of all food- related annual emissions. So, a lot. Obviously, a global shift to plant- based diets doesn’t automatically address the technological, social and political culture that helped create climate change in the first place.

Still, when you consider that industrial meat production alone makes up 15% of global greenhouse gas emissions, then plant-based diets look like an attractive and effective climate solution.?

Buck the Trend

So, perhaps it shouldn’t have been a surprise when Greggs, the UK’s largest bakery chain, launched a vegan sausage roll at the beginning of 2019. It was a smash hit. The bakery kept selling out week after week. And by the end of the year, Greggs’ sales?grew by a record 13.5% compared to the previous year. Overall, the bakery chain posted a 27% rise in its pre-tax profits in 2019 – and did so despite the UK economy effectively grinding to a halt.

It’s remarkable how well businesses can do when their products align with the world’s most pressing issues.

We may have only looked at vegan sausages and renewable energy so far. But the reality is that these positive ESG trends seem to be near-universal.?

Money, Money, Money

Let’s look at the financial markets. ESG funds are booming. Even during the Covid-19 pandemic, they attracted record amounts of investments. As a result, ESG assets under management reached record heights in the summer of one of the most difficult years in modern history. In June 2020, they climbed above $1 trillion. In other words, there is more money in ESG funds today than the worth of the entire Dutch economy.

Still, putting money into more ethical businesses is one thing. The question again is: do such investments generate good returns? The simple answer is yes, they do.

The Chicago-based financial research firm Morningstar says sustainability in general performs better. The hundreds of sustainable funds the company analyzed outperformed their peers – both in the midst of the pandemic and over the course of an entire decade.

New York-based asset management firm BlackRock says that 88% of their ESG indices outperformed their non- sustainable peers in the first four months of 2020. Other asset managers, such as Allianz and Invesco, observed the same thing. The American stock exchange, NASDAQ, says that the most sustainable companies within the largest 500 US companies showed both higher returns and less risk over the last five years.

All of this is just a complicated way of saying that it’s not only consumers who reward sustainable businesses – it’s markets too.

The Fine Print

There are, of course, some caveats we have to mention (as well as that the value of investments can go down as well as up). This is mostly because quantifying ESG metrics isn’t exactly a standardized practice.?

There is an army of frameworks and standards to help businesses report their ESG performance to investors. Hidden behind technical acronyms (SASB, GRI, IR, TCFD, CDP, WDI etc), all these systems are slightly different. On top, there are multiple agencies whose job is to evaluate and rate companies based on their ESG performance. Some of the biggest agencies are MSCI, Sustainalytics, RepRisk and ISS. So, depending on which reporting framework a company uses and the ratings you look at, you will get very different views of the same business.

Of course, all of this makes for tricky comparisons: what counts as an ethical business in one place may not meet certain sustainability criteria elsewhere.

According to an MIT study, firms that are in the top 5% for one ratings agency might easily belong to the bottom 20% for another. Like the tale of the blind men and the elephant, you never see the whole animal at once. And this has real-world consequences. First, we have to remember that investor confidence has an influence on the price of a company’s stocks. But because ESG ratings are so different, we can’t truly know how much of an increase in the stock price was due to the business’s ESG performance. Is that company doing well because it’s ethical? It’s hard to tell.

Second, improving ESG scores with one rating agency won’t necessarily improve scores with another. This can disincentivize companies from investing in their ESG strategy.

Third, socially responsible measures by a company require investment, which may dampen profits in the short term. While it’s not the norm, it’s possible for a company to blame poor performance on ESG investments. All of this makes definitive ESG findings finicky at best. It follows that when we read how ESG funds are outperforming their peers over relatively short time frames, – or even underperforming – it’s wise to look closely at each case.

But let’s not forget that protecting our natural environment and our communities is what makes business possible in the first place.

So, no matter how financial markets measure performance in the short- term, building on ESG opportunities remains a business imperative for long-term success.?

To get your free copy of our new book on best practices for sustainability in business“Dare to Care. How doing good helps business do better” please drop us a line at [email protected]?