You’d be forgiven if you thought I was writing about life at the grand old age of fifty, many of the readers of this article will no doubt be near or around that key milestone, half a century. Generation X, and at the prime of their careers whilst potentially preparing to hand over the baton to the next generation of leaders. That thought causes us to reflect on what state of business we are handing over, what shape is it in? How healthy is the company? Across all capitals, including financial, natural and human capitals.
This article is about a much more serious 50, hitting 50 degrees Celsius. Whilst globally many regions and cities regularly hit high temperatures of up to 50 degrees, or even higher yet. But there are many more cities that are seeing a rapid increase in temperatures, for example Kuwait saw record temperatures of 53 degrees in July 2021, making it the hottest place on earth.
COP27 gives us a great opportunity to move into action. We need action, not more statements and press releases.
The Middle East is warming at twice the rate of the global average. At this rate, by 2050 temperatures will increase by 4 degrees.
Human influence has warmed the climate at a rate that is unprecedented in at least the last 2000 years. Thus the world faces inter-connected crises of biodiversity loss, climate change impacts, and human development inequities. Humanity is facing the next great extinction event. With polluted oceans and greenhouse gas emissions increasing, inevitably, the climate is changing. The earth’s ecosystems are reaching a tipping point beyond which means that business continuing along the same patterns will no longer be viable.
The United Nations Framework Convention on Climate Change's indicators show that governments around the world are not close to the level of ambition needed to limit climate change to 1.5°C and meet the goals of the Paris Agreement 2015. A lot hinges on the agreements and commitments that will come out of the United Nations Climate Conference in Glasgow. There is hope that deep cuts in emissions of greenhouse gases could stabilise rising temperatures. Echoing the scientists' findings, UN Secretary General António Guterres said: "If we combine forces now, we can avert climate catastrophe. But there is no time for delay and no room for excuses. I count on government leaders and all stakeholders to ensure COP26 is a success.”
We can witness a recovery within this generation, as put by Sir David Attenborough at the opening of COP26 climate conference in Glasgow on 1 November 2021.
How might we make this transition towards the path of recovery? This is the chance for the private sector to step up, deal with the climate crisis, and it can only be done with the private sector leadership and commitment.
Consumers are demanding products that don’t cost the earth. Governments and investors are calling for business to move from destroying the variety of life on earth, known as biodiversity, to contributing to its restoration. To deliver a sustainable economy, companies (primarily the led by the private sector) will need to:Understand their impact and dependence on the natural worldFocus on Net Zero and carbon capture mechanisms• Set science-based targets to drive down impact and safeguard supply chains• Act to conserve and restore biodiversity in collaboration within their own sector as well as across sectors
Companies that do not rapidly change will become the brands of the past, as extinct as the wildlife they impact upon.
Our activity is changing the climate in unprecedented and sometimes irreversible ways, but scientists say a catastrophe can be avoided if the world acts fast.Governments and investors alike are calling for companies to move from destroying the variety of life on earth – biodiversity – to contributing to its restoration, regeneration and stewardship.
The public is now better informed about the degradation of natural capital, resulting in investors increasing demand for sustainable investment options. Those investors are now seeking assets with transparent and robust Environmental, Social and Governance (ESG) credentials. Moreover, they require strong returns out of investment funds and trusts.
Now is the time. The global coalition committed to net-zero emissions by 2050 is growing, across Governments, businesses, investors, cities, regions and civil society. COVID-19 recovery plans offer the opportunity to build back greener and cleaner. Decision‐makers must walk the talk. Long-term commitments must be matched by immediate actions to launch the decade of transformation that people and our planet so desperately need.
What is the role of the board?
At the end of the day it is board directors, individually and collectively, who must discharge their duty to protect the interests of their stakeholders and shareholders. The concept of stakeholder capitalism, whereby business leaders are required to define their mission as creating long-term value not only for shareholders but also for customers, suppliers, employees, communities, and others, is becoming much more popular and provides a better lens through which business leaders and boards can govern their business prudently with a keen eye on the long-term horizon - for future generations and not just our current Gen X, Y and so on.
This is where investors and finance comes in to play a key role.
Environmental, Social and Governance (ESG)
One of the key roles of the board in any organisations is about setting the purpose, vision, mission, values and strategy of the organisation that the board is overseeing. The ESG approach to investing doesn’t just focus on financial returns, it also uses ESG factors to evaluate how sustainable companies, and arguably future-proof, they are.
ESG -led companies, and investment funds and trusts even more so, inherently promote the setting of ambitious, long-term sustainable objectives, which will enable them to get a better position in an increasingly competitive market. Good ESG practices are a result of good governance and oversight and it is here that good governance plays a key role since the board that drives and incorporates ESG matters into investment processes and internal decision making for companies, and therefore transforming the entire work dynamic, decision making and strategies of a company.
Organisations’ awareness increases and the behaviour and culture shifts as they begin to put in place plans and actions to address and mitigate their social and environmental impacts with a long-term view. That is the only way to manage and minimise future business risks and improve their corporate image for both investors and the community.
Often, the process of implementation of ESG dimensions creates opportunities for innovations, both within an organisation and also from an investment perspective allowing organisations not only to differentiate themselves from competitors with an innovative and strategic approach but to also drive improved efficient, savings and products. This is highlighted in Porter (1991) where the research clarifies that the cost of implementing and reporting on an organisation’s ESG performance may be an investment by the organisation that will be recovered and rewarded as it potentially improves efficiency and productivity.
Signalling the heightened importance of ESG investments, FTSE Russell, a leading global provider of stock indexes, recently moved to tighten up the rules around reporting on ESG as well as the level of performance that listed companies are reporting. FTSE Russell has notified hundreds of companies of their removal from the approved lists over ESG performance and disclosures. Increasingly, corporations and their boards are actively being challenged on their ESG performance as indexes—and ultimately users and investors—are toughening up their approach to climate performance and the impact of carbon emissions. FTSE Russell claimed that 208 companies risk ejection from the FTSE4Good indexes because of low scores against new ESG standards. The companies on a warning represent 10% of index members. One hundred and five are from high-emitting industries, which have traditionally been good earners and stable income providers for more risk-averse investors.
In addition, FTSE Russell is acting in response to requests from investors demanding more transparency in the form of improved reports detailing how those companies will increase their efforts to tackle global warming and climate-related risks.
Drivers for ESG investing
Apart from the obvious benefits of creating a more ethical portfolio, there is evidence that ESG investments deliver similar returns as traditional investments, potentially carrying less risk. Bloomberg has estimated the total assets under management tagged ESG could reach $53 trillion by 2025, amounting to more than a third of the projected global assets of $140 trillion. By the end of 2021, ESG assets could amount to $37.8 trillion. In addition, businesses are starting to recognise that while sustainability trends, including climate change and resource scarcity, pose significant commercial risks, they create many opportunities. Incorporating these factors into both organisational risk management and business planning is imperative. Therefore, companies need to make environmental considerations accountable. Sustainability and profitability are intrinsically linked.
ESG investing and high returns
A 2019 white paper produced by the Morgan Stanley Institute for Sustainable Investing compared the performance of sustainable funds with traditional funds and found that from 2004 to 2018, the total returns of sustainable, mutual and exchange-traded funds were similar to those of conventional funds. Meanwhile, other studies have found that ESG investments can even outperform conventional less sustainable ones. ‘JUST Capital’ ranks companies based on factors such as whether they pay fair wages or take steps to protect the environment. It created the JUST U.S. Large Cap Diversified Index (JULCD), which includes the top 50% of corporations in the Russell 1000 (a large-cap stock index) based on those rankings. Since its inception, the index has returned 15.94% on an annualised basis compared with the Russell 1000’s 14.76% return.
ESG investing and lower risk
The 2019 white paper from Morgan Stanley also highlighted that sustainable funds showed a lower downside risk than traditional funds, irrespective of the asset class. The study found that traditional funds had a significantly larger downside deviation during turbulent markets, such as the fluctuations in 2008, 2009, 2015 and 2018, than sustainable funds. This means that in comparison, traditional investments had a higher potential for loss. It is interesting to learn that ESG funds have posted strong performance during 2020. Of 26 sustainable index funds analysed by investment research company Morningstar, 24 funds outperformed comparable traditional funds in the first quarter of 2020 (during the beginning of the COVID-19 pandemic).
Role of leadership - the board, governance and ESG
As investors are becoming increasingly aware that a company’s performance on material ESG elements is linked directly to its long-term profitability, ESG investing is rapidly becoming mainstream, a fact that is transforming “sustainable investing” to “investing.” Most CEOs are now aware that ESG issues should be part of their corporate strategy and act cohesively in their decision-making. However, a survey conducted by PwC in 2019 of more than 700 public company directors found that 56% thought boards were spending too much time on sustainability. Findings suggest that this may be due to corporate boards lack of diversity, with most directors surveyed as male, white, and from similar backgrounds. In addition, until the last few years, boards predominantly did not have a mandate or oversight of the company’s sustainability, strategy or performance, focusing primarily on compliance tasks. This is rapidly changing worldwide and has given rise to the concept of corporate purpose, which is becoming more widely adopted and means that boards need to increase their focus on ESG concerns and manage their company for long-term success.
Here is to the next 50 years and beyond and to humanity’s intelligence and ability to overcome.
Author: Sandra Anani
Sandra Anani is passionate about sustainability, with over 19 years’ experience. She has dedicated her career to sustainable development and communications.