Why Investors Hold The Key To A More Sustainable Planet

Since the first Climate Change Summit in 1979, we’ve been approaching this very precipice at an alarming speed. There’s been ample warning, whether from scientists, such as James Hansen, or activists, including the much-adored David Attenborough and the inspirational Greta Thunberg. All too often these warnings have been refuted and ignored. Now, though, we’re in the throes of battle against climate change, with world leaders coining it an ‘environmental Armageddon’.

For businesses, this urgency is now being communicated most prominently by worried customers. With increasing regularity, customers are refusing to purchase from businesses that are not sustainable or ethical in their practices. This trend has been accelerated by COVID-19, with 37% of UK and Irish shoppers now more conscious of their impact on the environment since the pandemic.

As customer priorities change, businesses have to adapt. The risk-reward dynamic is clear for business leaders: either they improve and expand their sustainability initiatives, securing a new segment of customers, or they stand still, losing both their competitive edge and existing customers in the process.

Why are investors so important?

Tipping the scales further in the direction of ‘reward’ is the increasing prevalence of sustainable financing. This initiative entails investors taking environmental, social and governance (ESG) considerations into account when providing businesses with investment. We know now that businesses that operate sustainably will be rewarded by investors – Chanel is a great example. The designer fashion label recently raised its first sustainability-linked bond with BNP Paribas. In line with sustainable financing, Chanel will only have to pay a premium on the bonds if they fail to meet their sustainability goals, which include ambitious Science-Based Targets like shifting to 100 per cent renewable electricity in its operations by 2025.

Businesses that don’t adapt face the ultimate risk of losing the support and financial backing of their shareholders. This is because the statistics show that public sentiment is rapidly shifting towards sustainability, which is being reflected in their shopping habits. 73% of customers are now expecting online businesses to minimise packaging and use recyclable packaging where possible. Pure and simple, businesses that fail to align their practices to these expectations will lose customers. This will only get worse as time goes on and customer attitudes continue to shift. Surprisingly enough, this isn’t a sustainable business model that shareholders want to back. Instead, they will take their investment elsewhere.

It’s not all about the E

While sustainability should certainly be an immediate focus for businesses, it is not the only area where they will need to improve. There is, after all, a reason why it is called ESG – rather than E (or S or G). Under more pressure than ever before, businesses must not forget the (S)ocial and the (G)overnance in their ESG efforts. Again, these are areas gaining in importance for customers.

On the social side, COVID-19 and the Black Lives Matter movement have accelerated customer demands for more ethical business. Just as sustainability is taking a higher precedence, so too is diversity and inclusion. During the Black Lives Matter movement, we saw significant backlash against businesses in opposition to the movement, or who customers felt weren’t doing enough. This backlash wasn’t just online, but had an impact on the bottom line too. Meanwhile, those businesses that bastioned the movement, such as Lego and Ben & Jerry’s, were lauded and supported by customers.

Yet again, to become a truly ethical business that customers can get behind, it is not a one stop shop, and more than just diversity and inclusion must be addressed. Businesses must also ensure that they are sourcing products ethically, tackling issues such as the gender pay gap, and deciding which of literally thousands of other initiatives they want to focus on. They must also make all of this visible to the customer, and most importantly, authentic – no longer do most consumers tolerate greenwashing or veiled attempts at solidarity.

However, unlike with sustainability, where we are seeing incentives such as sustainable financing take off, incentivising the social and governance side of ESG is somewhat more difficult. It runs even deeper than this, though. There aren’t even any real metrics by which to measure these areas of ESG. This is an issue for two reasons. Firstly, it provides businesses with few realistic objectives to achieve, making real progression far too subjective. Secondly, and this ties into the previous point, it means that there is no real consequence for businesses that fail to improve in these areas.

Missing out on measurement

Looking at sustainability as the benchmark, the European Commission has laid out its 2030 climate and energy targets. By 2030, its aim is to achieve at least a 40% cut in greenhouse gas emissions (from 1990 levels), at least 32% share for renewable energy and at least 32.5% improvement in energy efficiency. Businesses that fail to do their bit in achieving this will be held accountable. As a result, we are seeing many businesses pledging to become carbon neutral before 2050.

Objectives and consequences lead to results. Now, if we look at the social side of ESG, what targets exist for tackling the gender pay gap, for improving diversity and inclusion in the workplace, for sourcing products ethically? The answer? None, or at least none that have been universally agreed upon.

If we are to achieve positive change across all areas of ESG, we need palatable targets to aim towards. Having these metrics in place will not just inspire (or force) businesses to adapt, but it will provide us with metrics by which we can measure change and improvement across the globe. Businesses and governmental organisations must work together to achieve this. It is, after all, now in both of their best interests.

Ultimately, what business leaders must now recognise is that ESG is not just a ‘nice-to-have’, it’s essential to the future prosperity of their company. As consumer expectations are shifting in line with ESG, businesses will lose consumer demand, investment and shareholder support if they don’t make the necessary changes. This may seem like a very sudden and extreme change but, the truth is, it’s been in the offing for decades. Businesses have just chosen to ignore it.

Now, there’s no choice but to act  – and COVID-19 has provided an opportunity to pause, reflect and redesign accordingly