By Jessica Wee
The investor of today is not the same as the investor of the past – we are all better informed since the advent of the internet. While the goal of increasing wealth through savvy investments remains the same, the methods of choosing which company to invest in are gradually changing.
Concerns about the environment, social impact, and good governance are pushing more investors towards what is currently known as Environmental, Social and Governance (ESG) investing.
Thus, sustainable investing is an inclusive method of embedding these values. It is also different from ethical investing in that the screening is mainly positive – rather than ‘screening out’, we would ‘screen in’ i.e. focus is about doing good, rather than avoiding bad.
While we search for companies that have a positive impact on society and have strong ESG credentials, we should never lose sight of the fact that our aim as investors is to always choose the investments that have the potential to outperform and make strong returns over the long term.
Markets often undervalue companies that can have a positive influence on society and the environment. Those days are behind us as we see more ESG driven effort in the investment society that are aimed to exploit this inefficiency. Studies have also shown that when we invest in companies which are positive for the environment and society, it is also better for long-term return on investment.
What exactly are the benefits of investing in ESG compliant companies and can it be profitable? Let us examine the economic benefits of incorporating sustainability in businesses.
- Mitigates risks
If you have heard the expression high risk – high reward, you should also know that risks can get expensive and harm the brand. When operating in any kind of business, from retail or manufacturing, to financial services, risk is a part of the industry.
Many elements of risk can be mitigated through transparency. With active efforts in mapping existing risk factors, a company can recognize potential opportunities and minimize its risk, making sure that unforeseen issues are nipped in the bud. A good understanding of the value chain and proactive risk mitigation creates a buffer that can be very valuable when problems arise. Perhaps the factory that supplies a certain product to an organization is at high risk of corruption due to geographical location, or has lacking documentation on safety standards, which increases potential risk factors for its employees – and subsequently, the brand. Setting standards on suppliers and requesting additional information to gain full understanding is always cheaper, and more sustainable, than being caught off guard and dealing with a crisis.
Nudie Jeans (a fashion company) leads the way in how supply chain transparency helps to mitigate risk. It uses a high proportion of eco-friendly materials including Global Organic Textile Standard cotton and reuses most of its offcuts to minimise textile waste. Its use of eco-friendly materials limits the amount of chemicals, water and wastewater used in production.
A quote from Nudie Jean’s sustainability manager – it’s “important from a risk management perspective as knowing your supply chain is key and the first step towards taking responsibility. If you do not know your supply chain, how can you be sure there are no non-compliances?”
2. Attract investments
While the climate crisis is getting more acute and governments are pumping funds into reaching the Paris Agreement goals, the capital market are showing an upward trend in sustainability especially in the issuance of green bonds.
Green bonds are funds that have “positive environmental and/or climate benefits”. In just over a decade, green bonds have gone from a fad to reality. Climate Bonds Market Intelligence latest analysis has revealed GSS+ (Green, Social, Sustainability, Sustainability-Linked and Transition) themed debt rose to almost USD1.1tn in 2021, marking a 57% increase upon 2020 volumes.
For equities, the stock price for a new green issuance tends to rise i.e. investors are bidding higher on the expected performance on green bonds. From an issuer point of view it means, simplified, that investors value the company higher and see more potential in the long term, and therefore, attracting more investments. Hence, the ESG performance of companies plays a substantial role in the capital market.
3. Direct savings
Being resource efficient means being smarter; paying less for energy, water and waste management and going all in for doing the same, but with less. It’s a win-win for both the climate and for the company.
A prime example of a company that has managed to do just that is Unilever, which has adopted ‘eco-efficiency’ in their operations, stating that it has avoided costs of €733 million through energy savings, €112 million water-efficiency and €223 million through waste management in their factories since 2008.
4. Gain customer loyalty
Listening to the consumers can teach us a lot about the current market expectations. A survey by Deloitte reveals that millennials and gen z, the largest growing consumer groups, want to support sustainable brands, and are increasingly willing to pay more to do so, while saying bye bye to companies showing tendencies of unsustainability.
Do consumers practice as they preach, or are they more price-sensitive than they actually claim, you ask. A study by the NYU Stern’s Center for Sustainable Business examined the consumption of consumer packaged goods in the US, and found that the sales of sustainably marketed products was overrepresented, delivering over 50% of the market growth, while only representing under 17% of the market share.
The same trend can be observed across the globe, with e.g. a whopping 79% of the Dutch, and 72% of the Swedes stating that their purchasing decisions are influenced by sustainability aspects.
The strong support from consumers in sustainable brands also indicates that the survival of companies that are not yet investing in their sustainability, depends on their ability to adapt.
5. HR strategy – Employee retention
Sustainability is as important internally as it is to external stakeholders. Being able to show that sustainability is a top priority is not only an advantage in recruitment and when trying to attract new talent (not forgetting that millennials are the biggest workforce of today), but a way of taking care of existing employees. Having clear processes and being transparent about performance indices, preventing overtime and stress, and knowing how to act when an employee gets sick is a safety net for the company’s talent. Moreover, employees that feel like they’re doing meaningful work are more committed. This goes to show that companies who are engaged in sustainability, both social and environmental, are better at taking care of and keeping their talent.
In a nutshell, the benefits of sustainability for a company are extensive, and absolutely vital for companies in order to thrive. Both governmental incentives and consumer behavior are pointing to the fact that the market is expecting, and even demanding companies to invest in their sustainability work.
Know your risk, spend less money, get more support from your investors and be relevant for consumers and employees now and in the future. It is a win-win for everyone!