|Author Name:||Katrin Scholz-Barth|
|Date:||Jun 17 2021|
Return on Sustainability
We live in a world of business ambitions, especially here in the Middle East, where innovation and entrepreneurship are widely aspired to. Yet, ambitions toward the biggest problems of all, to reverse global warming, are almost entirely nonexistent. Strategic sustainability is still undervalued as a business tool to identify promising opportunities that secure profits.
But when the Wall Street Journal reports that “Green Finance Goes Mainstream” it’s time to take note and get onboard to cash in on sustainability.
While business and industry have been and still are mainly responsible for global warming and climate change, business and industry are also the institutions capable of reversing the trend by changing course. Access to finance determines business models and operations in every industry, so far having driving up share prices of conventionally profitable companies even if they are big polluters, responsible for climate change, like oils and gas, while penalizing purpose driven businesses that serve all stakeholders because of perceived lower returns.
However, the tide is changing fast. Banks and the investment community have come to realize that it is in fact climate change that brings material risks with financial implications that put investor’s assets at risk. To secure long-term financial returns and to grasp growth opportunities, banks are starting to screen out these climate risks with green finance.
Green finance is no longer a niche market but a worthy investment option. Newly created funds assess financial performance in combination with environmental impact by considering Environmental Social Governance (ESG) and support businesses that align their corporate purpose with the interests of all stakeholders, including climate, biodiversity and the environment. These funds are raising trillions and pave the way for a profound global economic shift and energy transition from fossil fuels to renewables.
“Some of the world’s biggest companies and deepest-pocketed investors are lining up trillions of dollars to finance a shift away from fossil fuels.” It’s the amount and pace at which this is happening is remarkable, to the tune of $3 billion a day, or $2 trillion globally, during the first quarter of 2021 alone.
The best part is the surge of cash flowing into these green funds is entirely market-driven and based on investor demand, not because of imposed regulations. Large pension funds and young investors who see their future at risk have started to direct their money toward low cost, high yield ESG-focused industries that offer a greater return on investment and a cleaner world at lower risks with lower carbon emissions.
According to New York University’s Stern Center for Sustainable Business, ESG disclosure by itself does not drive returns, but addressing climate risks with innovations to reduce carbon emissions does. The incentives include lower cost of capital, market and tax advantages and better reputation.
To decarbonize the future requires attractive alternatives that are profitable, as Tesla electric cars are proving. But this is not new. Return on sustainability has always been about resource efficiencies and long-term profits and wealth creation. In 1994, the CEO of Interface, the world’s largest carpet tile manufacturer took the lead and committed to a ‘mid-course correction’ from the previously petroleum-based to a zero-impact company by 2020, propelled by an innovation-based green strategy. “Unless someone leads, nobody will. … Why not us? … This strategic leadership is a “powerful marketplace differentiator, increasing sales and profits.”
Strategic Sustainability for Decarbonization and Sustained Return on Investment
Decarbonization simply means producing less greenhouse gases and releasing less carbon dioxide into the atmosphere. The ultimate goal is to generate no greenhouse gases to reach regenerative growth to operate profitably in the future and sequester the legacy load, existing carbon dioxide already in the atmosphere.
In business terms this means assessing a company’s net worth:
Net Worth = Assets – Liabilities.
Liabilities include financial debt and externalities. Environmental impact and carbon emission are externalities that until now have not been priced or accounted for. Unless we assign real value to all forms of capital, including positive cash flow, healthy human communities and functional ecosystems, there is no net worth and operating at net-positive ecological impact remains an illusion. Every executive understands that both sides of the balance sheet – assets and liabilities – determine a company’s value, net worth and profitability.
Green finance is the vehicle allowing businesses to adjust strategies to become regenerative, businesses and change operations toward net positive ecological impact and carbon neutrality.
Return on Sustainability - Industry Examples
The first step to a healthy return on sustainability is to build sustainability into the profit equation. Focusing on resource efficiency to lower capital employed and using fewer resources, will drive profits. That is why Google, Amazon, Facebook and other big internet companies have invested in renewable energy to cool large server farms and increase energy efficiency while reducing operational expenses and environmental impact.
Many more examples are found in industries ranging from transportation, agriculture, food, water, energy, education, health, waste, smart cities/built environment to construction and confirm return on sustainability, especially with regards to the energy transition to renewables.
For instance, United Therapeutics delivers 3D-printed organs for transplantations with electric helicopters decarbonizing the health and transportation sectors simultaneously. Air Protein grows protein (meat) from atmospheric CO2, packaged in plant-based plastics. In construction, algae-powered buildings use bio-reactive façades for heating and cooling, while kelp farms breathe new life into oceans and produce carbon-positive foods. And for car and racing enthusiasts there is power in decarbonization. The five fastest cars ever, are all electric, including Aspack Owl (0-60 in 1.7 sec), Rimac C Two, and Lotus Evija.
There is great potential for strategic innovation because efficiency increase is limited. Business survival and sustained economic development depend on radical and transformational innovations along the entire value chain to secure a clean future.
As discussed throughout the Strategic Sustainability blog series, solving real complex, challenges like climate change and fulfilling the 17 UN Sustainable Development Goals (SDGs) is a $12 Trillion per year opportunity for sustained returns and sustained life.
“Collective research points to the need for a new management paradigm for corporate leaders—one in which ESG considerations are embedded in both strategy and operations,” conclude the authors of Harvard Business Review article “Social Impact Efforts that Create Real Value” after analyzing more than 10,000 companies.
Green capitalism responding to market demands is the real force behind competition that mobilizes creative minds and businesses to cash in on sustainability. “We might not have survived that recession but for the advantages of sustainability,” said the Interface’s CEO of the recession from 2001 and 2003. “A better business model, a better way to bigger profits. Here is the business case for sustainability. From real life experience, costs are down, not up, reflecting some 400 million dollars of avoided costs in pursuit of zero waste … . This has paid all the costs for the transformation of Interface.”
We can build a better world and actively shape the future by implementing strategic sustainability in inclusive, transparent, accountable, and fiscally responsible ways that lift up humanity and reduce our vulnerability from climate change.
Dr Amal Ahmadi - Henley Business School
Aug 06 2020
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