01/05/2019 – Sustainability / Climate / Business
Climate Change means Business
The authors of new book ‘Winning Sustainability Strategies’ tell Industry Networker that now is the time for companies to move their sustainability programmes forward in order to achieve purpose with profit.
In 2016, BlackRock’s Scientific Active Equity (SAE) team found that US companies with higher climate scores tend to be more profitable and generate higher returns on assets.
Selecting a portfolio that was biased on CO2 performance, chosen from Russell 3000 Index companies, the weighted average of CO2 emissions came out almost 50 per cent below the benchmark average. Financially, this same portfolio selection outperformed the Russell benchmark by as much as seven percentage points.
Similarly, research on the Dow Jones Sustainability Index data shows that sustainability leaders outperform their industry average by as much as 25 per cent – and the differences between industries are as high as 36 per cent. Given such findings, what can fast-followers do to close the gap and increase their appeal to investors?
COP24: CEOs demand more action from governments
In the run-up to the recent UN Climate Summit in Katowice Poland, governments were encouraged to bring their A-game by business leaders from around the globe. Shortly before the Summit, the Alliance of Climate Action CEOs – a group of leaders of 50 major global businesses brought together by the World Economic Forum – published an open letter to governments demanding better collaboration to accelerate outcomes in the race against climate change. In their appeal, the CEOs – jointly representing more than US$1.5 trillion in total revenue – emphasised the importance of partnering and public-private co-operation.
Touted as first movers in sustainability, the CEOs stressed the importance of the business case for cutting emissions to generate wider support in the private sector. Moreover, better public-private co-operation was demanded to accelerate effective carbon pricing mechanisms and policies that incentivise low-carbon investment and drive demand for carbon-reduction solutions.
“Business has an increasingly vital role to play in accelerating the shift to a low-carbon and climate-resilient economy. This will require partnerships with other companies, governments at all levels and civil society. It also requires bold leadership and good governance, which will allow long-term creation of shareholder value alongside long-term value for our society,” said Feike Sijbesma, CEO and Chairman of the Managing Board at Royal DSM, and Chair of the Alliance of CEO Climate Leaders. “We, as business leaders, are committed to climate action and stand ready to facilitate fast-track solutions to help world leaders deliver on an enhanced and more ambitious action plan to tackle climate change and meet the goals set out at the 2015 Paris Climate Agreement.”
During the UN Climate Summit (COP24), negotiators from around the globe worked for two weeks on the Katowice Climate Package, aimed at implementing the Paris Agreement. Following hard work and tough negotiations, COP24 resulted in almost 200 countries signing a complex rulebook for the implementation of the Paris Climate Agreement.
However, in the aftermath of the Summit, many experts remain uncertain as to whether the results from COP24 – described by some as “we did what was possible, not what was needed” – are sufficient to stay within the 2ºC scenario of the Paris Climate Agreement. More disturbingly, in its most recent report the IPCC states that carbon pollution must be almost halved by 2030, in order to avoid 1.5ºC of warming, and then reach “net zero” by the mid-century point. This latest increased objective requires an even more drastic review of measures by global industries and governments.
Sustainability leaders’ superior climate strategies
With the battle for sustainability heating up, banks such as ING and DBS are already rolling out sustainability-performance-linked loans to align their portfolio with the Paris Agreement 2ºC scenario. Big investors are increasingly factoring in sustainability performance in their investment decisions, and the investment community has been advancing its approaches for the valuation of impact, making the sustainability performance more measurable. In parallel, according to World Bank figures, carbon pricing is on the rise, raising the cost for carbon inefficiency. As BlackRock, the world’s biggest investment firm, concludes: “There can be little downside to gradually incorporating climate factors into the investment process – and even potential upside”.
In the annual composition of the Dow Jones Sustainability Index (DJSI), the climate strategy criterion is one of more than 20 criteria that make up the full assessment – as compiled by DJSI composer RobecoSAM. Sustainability leaders such as the companies represented by the 50 CEOs are clearly ahead of their sector average, outshining their peers in ‘green appeal’ to investors. Comparing the average score on climate strategy with the marks of the top performers over the three-year research period demonstrates that, on average, sustainability leaders outperform industry averages by 16 per cent.
Even more striking is the difference in performance when comparing the selected industries with each other; the scores of the highest-scoring industry (Construction Materials) and lowest-scoring industry (Telecom) differ by 36 per cent, on a topic that is recognised as being highly relevant for both industries.
While most companies zoom in on the eminent risks associated with a changing climate and are sometimes tempted to divert their attention to other sustainability issues, sustainability leaders were found to proactively seek and seize the business case linked to climate change. In part, this explains the striking score differences between those sustainability leaders and their sector average.
In anticipation of increasing unavoidable measures and investors increasingly regarding climate strategy as an indicator of future profitability, companies and executives must develop a new sense of urgency, moving their sustainability programmes from the realm of compliance and iterative improvements to that of a key driver of performance and innovation. And that requires embedding the sustainability strategy more deeply into the firm’s core strategies. The time for defensive approaches in broad sustainability programmes with great stories is rapidly passing. It is time to focus on core sustainability issues and show results.
More about the research
‘Winning Sustainability Strategies’ (Palgrave 2018, Leleux and Van der Kaaij) presents numerous award-winning cases from IMD business school, and examples from companies such as Unilever, Torres, Patagonia, Tumi, DSM and Umicore, alongside original ideas based upon 20 years of consulting experience.
Offering directions for CFOs to shift companies from integrated reporting to integrated thinking in order to accelerate their sustainability programmes, ‘Winning Sustainability Strategies’ illustrates how to achieve purpose with profit and how to do well by doing good.
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