June 2017

Is Sustainable Finance Relevant to all Businesses or Just Large Investment Funds?

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. 

  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, Enquire Now


Source: East & Partners 2017 Global Supply Chain Report

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