East&Partners research team have issued an important note on climate change. The note begins noting that, “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.”
ESG criteria integral to future strategies
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.
The E&P note comments that, “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.”
Still aim for strong financial performance
However, E&P found that, “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? E&P believe that, “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. “
CTMfile take: This research note raises some fundamental questions about the current business models and the role of business. For more information on East & Partners Global Supply Chain Research, see here.
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