Is sustainability a money-spinner?
The former US Vice-President believes that sustainability is the largest investment opportunity in history. Many agree.
It wasn’t too long ago when businesses believed that one could either have sustainability or profit, but not both. Driven by the logic of profit, they baulked at the extra cost of maintaining sustainable business practices. Nudged hard enough, many try to make do with token gestures, and “thoughts and prayers”.
Low demand for products, expensively-built adhering to environmental standards, resulted in poor returns. Unsurprisingly, early attempts at socially responsible investing was an uphill battle and inertia set in easily, write Tensie Whelan and Carly Fink of the New York University Stern Center for Sustainable Business in the Harvard Business Review.
But the global Covid-19 pandemic has forced a reality check in the wake of a once-hypothetical catastrophe becoming a reality. Suddenly, the possibility of rising sea levels and extreme changes in weather patterns no longer seems so outrageous. Considering the damage that Covid19 has wrought upon the global economy, there is a compelling business case for assessing and arresting climate risks to the global economy. Urgent action is needed — the UN says that the international community only has 12 years to avert irreversible environmental damage.
Carrie Johnson, founder of Singapore-based climate risk consultancy PAIA Consulting, notes that even five years before Covid-19 struck, many Singapore firms had been increasingly knocking at her door for help in developing a climate sustainability strategy for their businesses. The Australian bushfires in 2019, in particular, had affected the supply chains of many Singapore firms, while record-high tides in Venice last year also worried many business leaders based in this tiny island state.
“Many companies are now much more actively embracing sustainability and climate risk in light of Covid-19,” says Johnson, who has been helping businesses manage climate risks for two decades. “Covid-19 has been very much a test of a company’s resilience and [firms are] building up climate resilience so they are better positioned for the future,” she adds.
Talking heads at think tanks and research bodies from the World Economic Forum to the Asia Foundation are calling on the world to replicate its decisive response to Covid-19 in the context of fighting climate change — the true crisis of our times.
The sort of risks businesses face from climate change are diverse and high-stakes in nature. Extreme weather conditions like hurricanes and floods could damage business assets, while the increased prevalence of drought in other parts of the world could disrupt supply chains due to a lack of water for production. Geopolitical tensions could also potentially flare up, with China and Russia beginning to vie for influence in the Arctic as the melting of polar ice caps makes its waters a potentially lucrative, newer and shorter sea route for global trade.
“By 2050, in an average year, between 8% and 13% of GDP could be at risk as a result of rising heat and humidity,” warns an upcoming McKinsey Global Institute (MGI) report. Already, rising ocean surface temperatures of 0.7°C globally have seen a 35% reduction in North Atlantic fish yields, affecting both the fishing industry and the world’s food security. The problem won’t be confined to the Atlantic. Come 2050, global fish catches will fall by about 8% and associated revenue by 10%, with 650 million to 800 million people who depend on the fishing industry to survive suddenly deprived of a livelihood.
There are also less tangible risks as well: firms are increasingly subject to regulatory risks as regulators begin introducing sustainability legislation to combat climate change. The Monetary Authority of Singapore, for example, is even looking to introduce environmental risk assessment guidelines on local financial institutions.
Additionally, with the court of public opinion increasingly moving in favour of sustainability — especially among young people — firms are increasingly under pressure to improve on what is by now a common acronym, ESG: environmental, social and governance standards. Stakeholders, including both consumers and shareholders, are keen to know if a company’s operations are up to certain standards.
Indeed, investors have punished companies for not being up to mark in their ESG standards. Bank of America Merrill Lynch looked at the performance of 24 S&P 500 companies that had suffered from major ESG controversies of various kinds since 2014. It found that those controversies were accompanied by peak-to-trough market capitalisation losses of US$534 billion ($734.6 billion). This study was undertaken in the context of the S&P 500 growing by 7% on average. With markets no longer as willing to tolerate non-performance on “ESG”, firms must increasingly work sustainability into their business strategies to stay profitable.
“As with the climate and biodiversity crises, recent pandemics are a direct consequence of human activity — particularly our global financial and economic systems, based on a limited paradigm that prizes economic growth at any cost. We have a small window of opportunity, in overcoming the challenges of the current crisis, to avoid sowing the seeds of future ones,” urges a team of scientists from the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services, a UN scientific body dedicated to protecting biodiversity.
Green is the colour of money
But former US Vice-President turned environmentalist Al Gore does not see sustainability as yet another drain on profits. Rather, he smells ample business opportunities awaiting in the sustainability sector, as demand for such goods and services grows with firms slowly buying into the need to reduce carbon emissions and pollution in their operation. In fact, the growth of this sunrise industry could serve as a powerful engine of recovery from the Covid-19 recession.
“The most cost-effective way to create the new jobs and economic progress we’re going to need after this pandemic, is through a green stimulus programme,” he argues at the DBS Asian Insights Conference.
Gore notes that the sustainability sector isn’t just a destination for investment — it is a creator of jobs as well. Well before Covid-19, the fastest-growing job in the US was to be a solar panel installer, followed closely by similar roles like wind turbine technician. Job growth for the former is five times faster than average and is expected to grow 10 times faster over the next decade, he adds.
“On average, 2.65 full-time-equivalent (FTE) jobs are created from US$1 million spending in fossil fuels, while that same amount of spending would create 7.49 or 7.72 FTE jobs in renewables or energy efficiency [respectively]. Thus each US$1 million shifted from brown to green energy will create a net increase of five jobs,” notes economist Heidi Garrett-Peltier from the University of Massachusetts in a 2017 study. More workers with a stable income will fuel a rise in consumption, allowing for a quicker and stronger recovery from the Covid-19 recession.
In fact, Gore highlights a shift in energy investments away from conventional fossil fuels and towards renewables, with investments in renewables worldwide three times greater than in coal and gas combined. Electric vehicles are also becoming increasingly cost-competitive as prices begin to drop, potentially allowing automobile companies to develop sustainable vehicles for the mass market. US-based global financial services firm Morningstar found that sustainability funds have outperformed their peers over multiple time horizons, while US-based global investment management corporation BlackRock says that sustainable portfolios are more crisis-resilient.
“Sustainable investing has moved out of the shadows and into the mainstream. Clients want to know where their money is invested and, increasingly, what the impact is,” James Purcell, global head of sustainable and impact investing at UBS Wealth Management CIO, tells the Harvard Business Review. Markets are thus likely to increasingly price in ESG sustainability issues. Bloomberg has introduced ESG ratings in its terminals while some local brokerages, such as DBS Research Group and Maybank Kim Eng, are starting to perform ESG analysis as part of their research.
“The sustainability revolution is ... the largest investment opportunity in all of history,” proclaims Gore. The global shift towards more sustainable business practices, he declares, combines the magnitude of the industrial revolution with the speed of the digital revolution. According to the former US Vice-President, those who act quickly could reap the lion’s share of the profits from a more productive and efficient society; latecomers may be left eating dust in the former’s wake.
Johnson, the consultant from PAIA, adds that a strong sustainability focus is often an indicator of strong corporate governance. Taking the time to consider future climate risks implies that company leadership is proactive and meticulous about preparing their businesses for the future rather than concentrating on firefighting or short-term gains. “Many environmental issues are really about good housekeeping and cost structures,” she tells The Edge Singapore. Firms able to maintain a sustainable business are thus more likely to be in a robust financial position.
Swiss investment bank UBS has in fact named sustainable investments as the firm’s preferred solution for private clients investing globally. The first major global financial institution to make this recommendation, UBS believes a 100% sustainable portfolio can deliver similar, or potentially higher, returns compared to traditional investment portfolios and offer strong diversification for global investors.
“We believe sustainable investments will prove to be one of the most exciting and durable opportunities for private clients in the years and decades ahead,” says Iqbal Khan, co-president of UBS Global Wealth Management.
August Hatecke, co-head of Wealth Management Asia Pacific at UBS Global Wealth Management, agrees. “Our flagship 100% Sustainable Investment mandate [has] seen a 50% growth in invested assets. In its balanced strategy, it has rebounded 26% since the end of the market selloff in March with positive performance for the year,” he says.
In the long run, Johnson says, focusing on sustainability can help firms tap new business opportunities as organisations begin to innovate to reduce climate risks and carbon emissions. Singapore companies are working to develop new sustainability solutions such as urban farming, with some firms even installing solar panels on their rooftops to save energy costs. Local F&B startup Crust Group, for example, is even using surplus bread from hotels and restaurants to make craft beers and other beverages to help reduce food waste.
Implementing such sustainable solutions is, moreover, no longer optional for businesses as consumers become more conscious of ESG issues, and that’s a growing view. According to Sumit Agarwal, Low Tuck Kwong Professor at the National University of Singapore Business School, consumers and investors are now more conscious than ever about ESG when making consumption or investment decisions.
According to a July 2020 report by PwC, 43% of the consumers worldwide expect businesses to be accountable for their environmental impact. As such, Agarwal believes that it is ultimately consumer pressure that will push firms towards adopting a more sustainable way of doing business.
Early bird catches the worm
“The benefits of integrating ESG criteria into investment decisions are obvious,” says Marc Lansonneur, head of managed solutions, balance sheet products, and investment governance at DBS Wealth. With ESG, he points out, investors can achieve a “win-win” situation where they are benefitting financially while doing good for society. Fortunately, there is a growing range of quality assets available for investors such as thematic products and a range of ESG-integrated equity and fixed income funds that can suit an investor’s personal needs.
Lansonneur advises investors to take a twostep approach to improve their long-term portfolio performance. Investors must first assess the ESG status and/or rating of their portfolio to help them decide on the subsequent steps to take to achieve investment goals. When assessing new investments, moreover, investors should go beyond their usual selection criteria and seek advice from an expert about a firm’s ESG rating before making any decisions.
More financial institutions are taking a more active stance. For example, Maybank’s equity research team has started analysing companies by putting them through a systematic ESG framework. In an Oct 8 report, analyst Lee Yen Ling kept her “buy” call and RM9.53 price target on Top Glove, in recognition of the glove maker’s compliance with international ESG standards such as the Business Social Compliance Initiatives and Sedex Members Ethical Trade Audits. For one, since January 2019, the Malaysia-based company had, at the request of its customers, attended to more than 100 external independent ESG-related audits.
A leading ESG name on the Singapore Exchange (SGX) is City Developments (CDL), which topped Bloomberg’s Sustainalytics Environmental Percentile Index ranking with a score of 98.7. The company was awarded “Most Sustainable Company in the Real Estate Industry” by World Finance magazine’s Sustainability Awards for 2020. Under chief sustainability officer Esther An, CDL was the first real-estate company in Singapore to set a carbon emissions intensity reduction goal, verified by the Science Based Targets initiative, and the first Singapore company to issue a green bond.
CDL issued its first green bond in 2017, and from that initial $100 million, the company has continued tapping sustainable financing, including $500 million in two green loans in 2019. Via comprehensive energy efficiency efforts, CDL has saved $28 million in energy costs in eight managed buildings since 2012. “Businesses that are committed to doing well and doing good are proven to be more sustainable and many perform better in the long run,” says An in an earlier interview with The Edge Singapore.
While CDL’s operations, especially its hotels, have been hit hard by Covid-19, the company’s strong balance sheet leaves no question that it will emerge from the pandemic. With total cash and undrawn and committed credit facilities exceeding $5 billion, OCBC sees good value in acquiring an established property name with the deep reserves needed to weather out the storm. RHB’s Vijay Natarajan agrees, noting that CDL outperformed peers with 40% and 49% increases in unit sales and sales value in 2019 within a tough property market.
Another interesting prospect is agri-food counter Olam International, which recorded a Sustainalytics environmental score of 92.5 for 2020. The firm aims to re-imagine global agriculture and food systems by putting more back into food and farming systems than is taken out, arguing that this improves the firm’s resilience and opens up new business opportunities while sheltering it from climate and water risk. It has developed a comprehensive sustainability framework built around the UN Sustainable Development Goals to guide the firm’s operations.
The focus on sustainability has not been a drag on Olam’s earnings. For the six months to June 30, Olam reported earnings growth of 44.4% y-o-y to $332.7 million. Revenue in the same period increased by 7.1% y-o-y to $17.1 billion.
While an NUS Business School study of 100 leading brands found that sustainability reporting is positively linked to brand value, one-fifth of respondents do not engage in sustainability reporting.
ESG stocks have even performed better than blue chips on the SGX. “The five strongest constituents of the iEdge SG ESG Leaders Index in the 2020 year through to 8 May averaged a 11.4% total return over the period, compared to the five strongest STI stocks that averaged a 1.3% total return,” says an SGX report. Clearly, sustainability is no obstacle to profit.