The
2015 Global Goals for Sustainable Development (SDGs) and the Paris
Agreement on Climate Change have signaled a change in strategic
perspective in regards to establishing a global green financial system
based on sustainable practices. Sustainable, or green, finance refers
to any form of financial service integrating environmental, social and
governance (ESG) criteria into the business or investment decisions
for the lasting benefit of clients, the business itself and society at
large.
Sustainable finance and the integration of ESG criteria
has been spearheaded largely by pension funds and institutional
investors, driven by the understanding that these issues have
significant long-term impacts on risks and returns. More than 1,700
investors and managers have publicly signed the UN-backed Principles
for Responsible Investment representing a large portion of global
assets under management. While there is still work to be done in
turning commitments and intentions into actions and practice these
funds have started the ball rolling by declaring ESG criteria as
integral to their future strategies.
Following in the
footsteps of their governments, European institutional investors
consider sustainable investing to be part of their fiduciary
responsibility with funds such as the Dutch ABP implementing policies
to cut 25 percent of CO2 related investments from their overall
portfolio over the next five years. The Norwegian Government Pension
Fund Global (GPFG), the world’s biggest sovereign wealth fund, is
another investor leading by example. In 2012 the GPFG withdrew its
investments in 23 palm oil companies, the fund also refuses to invest
in firms with products deemed unethical such as weapons and tobacco.
The $22.6 billion New Zealand Superannuation Fund has adopted similar
policies to reduce climate-related risk. As funds become more activist
in their approach, concerns have been raised over returns and while
the managers have not reported any serious financial cost from
divesting away from certain companies and industries, ethical
decisions do still demand trade-offs.
Despite any concessions
made in the name of sustainable investing, investors still aim for,
and achieve, strong financial performance with assets invested in
sustainable strategies increasing year on year. According to the
Global Sustainable Investment Alliance’s most recent biennial report
assets invested in sustainable strategies rose to US$22.89 trillion
globally at the beginning of 2016. This is up 25 percent from 2014 and
accounts for 26 percent of all global assets under management. By
region, Europe had increased sustainable AUM by 12 percent from 2014
to US$12.04 trillion, the US US$8.72, up 33 percent; Canada US$1.09
trillion, up 49 percent and Asia (ex Japan) US$52 billion, up 15.7
percent. Australia/New Zealand and Japan reported the highest growth
in sustainable AUM up 248 percent and 6,671 percent respectively.
As sustainable finance finds its foothold among institutional
investors and guides their strategy, can everyday businesses,
particularly those in the middle and smaller end of the market also
benefit from a sustainable strategy?
Implementing
sustainable practices cannot be a simply altruistic endeavour for
businesses in the sub $100 million market. As with the investor
community before them, there needs to be clear and significant
evidence that sustainability is good for business.
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What started as a
‘feel good’ mission has grown to
include specific actions
including internal changes such as making an office more
environmentally friendly and its employees happier as well as working
with partners and suppliers to achieve a more sustainable procurement
process. All of which result in cost savings and increased efficiency
however the initial outlay has proved to be prohibitive to many.
Aside from making their own business more
sustainable and saving money, for businesses who are not looking for a
capital boost from institutional investors, can sustainability and
sustainable finance increase revenue?
By reinvesting
savings generated from internal sustainable practices, companies are
able to fund advanced technologies and initiatives that in ordinary
circumstances they would have done without or needed to take out loans
for. Increased effectiveness and efficiency is a long-term strategy
for a more profitable business and it is likely that the market will
continue to be led by activist firms until market benefits clearly
outweigh the short-term costs.
Buyers and business
partners will play an integral role in the transition to a more
sustainable global corporate environment. According to recent research
presented in East & Partners’ Global
Supply Chain report 60 percent of large businesses globally
require their suppliers to follow specific ESG conditions. For smaller
suppliers who make up corporate supply chains, not implementing
sustainable practices throughout their business, whether they are
green, social or governance, will result in loss of buyers and
revenue. A negative impact on their bottom line will be the catalyst
needed for many small businesses, however large businesses may
struggle to oversee and enforce the implementation across all tiers in
their supply chains.
Businesses that do
implement and adhere to ESG criteria may also stand to gain better
credit ratings due to lower associated future risks from their
providers however for this to happen it is imperative that reporting
and disclosure of ESG elements are standardised and uniform. As it
stands there are no set, universally agreed upon reporting criteria
making it difficult, if not impossible for businesses to communicate
their progress on ESG-related issues to their financiers. This lack of
framework also inhibits providers from being able to reward ESG
compliant business customers with more favourable lending conditions
and rates.
Sustainable finance can achieve and
accomplish much more than current levels for mid and small market
businesses globally. While the focus has traditionally been on
institutional investors and how listed companies can attract
additional investment through ESG compliance, more research and
discussion is needed around how businesses of all sizes can benefit,
succeed and grow their profits through sustainable finance solutions
and what role providers need to take going forward.
For more
information on East & Partners Global Supply Chain Research,
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