Sustainable investments: the great transformation for companies, investors… and consumers
In the past decades, the expected return on investment has been key for investors, more than ever before, to deciding where to invest. Return in the sense of financial return. But can financial return and sustainable investments make a successful match? Georg Kell is Chairman of Arabesque, a global asset management company characterised by an approach integrating environmental, social and governance big data with quantitative investment strategies. Georg Kell is also the founder and former Director-General of the United Nations Global Compact, the UN’s corporate citizenship initiative calling on companies to align strategies and operations with sustainability principles. He was one of the keynote speakers at the ECA Sustainability Reporting Forum on 17 June 2019. Georg Kell argues that, besides the need for corporate statesmanship, there is growing evidence showing that sustainability and profitability are wholly complimentary.
By Georg Kell, chairman of Arabesque
Public and private interests are increasingly overlapping…
The world is changing rapidly. The shift of power from the West to the East and rising nationalism are leading to rivalry and are hollowing out the rule-based system that has supported market expansion and integration for decades. Humanity’s growing footprint on the natural environment and the looming climate crisis will soon force our hands, whether we are ready or not. And technological change offers ever greater opportunities to disrupt established practices in both the public and the private spheres. The fast pace of these political, social, environmental and technological changes has — not surprisingly — created much uncertainty.
In these turbulent times where hope and fear, creation and destruction are so close together, the United Nations’ 2030 Agenda and the Paris Climate Agreement offer a North Star to renew the idea that managed global interdependence is the foundation of peace and prosperity. Many countries, especially in the European Union, have not forgotten the lessons of history, and for them the idea that human ingenuity is at its best when we collaborate for a greater common good is very much alive.
Business executives and investors have traditionally been reluctant to make their voices heard on broader societal issues. But this is changing. Realizing that healthy markets need healthy societies and that public and private interests are increasingly overlapping, a growing number of business executives are speaking up and taking public stands against discrimination and ethnic chauvinism. While the notion of corporate statesmanship is still in its infancy, there are strong indications that the looming climate crisis in particular is mobilizing the private sector as a force for good.
…creating new opportunities to become future-fit
A closer look at market-led changes suggests that a major transformation is indeed in full swing. Driven by the twin forces of digitalization and decarbonization, a growing number of corporations have been moving away from industrial-era concepts towards a future-fit model.
These changes have far-reaching implications for society and are opening up new opportunities to create a safe and prosperous future. A small but growing number of leading companies, mostly based in Europe, have decided to become carbon neutral by 2050. By doing so, they are undergoing a major transformation and are becoming a force for modernization by pushing for much-needed policy changes, such as carbon pricing and fiscal policies that favor smart and clean production and consumption.
A good example is the German VW Group which is applying the lessons learned from the Diesel Crisis by accelerating digitalization and electrification of transport.
Towards sustainable finance
Investors have been waking up as well. While they are still constrained by short-termism and by methods developed for the industrial era, and while it still makes financial sense to burn the globe, a growing number of investors are integrating environmental, social and governance factors into their decision making or are using their engagement with corporations to accelerate market transformation. As the systemic risks of social exclusion and climate change become more obvious, one can expect that investors will increasingly adopt and adjust their strategies. A major development that has been facilitating the interaction between responsible business practices and sustainable finance is data driven, and new tools such as Arabesque’s S Ray will help to advance this convergence between business and investors.
As early as 2014 a study undertaken by Oxford university and Arabesque found a positive correlation between long-term profitability and long-term sustainability. Businesses with a strategy for sustainability came out better after the 2009 financial crisis. Research shows that there is a relationship between normative values, and living up to them and profitability: the two go well together. Clearly in the world we live in today defining materiality without a moral orientation is not useful…and not sustainable. In short: integrating ESG into investment decisions does not hurt financial performance, on the contrary. And the financial world is starting to understand this: one third of liquid global finance nowadays goes into ‘green’ finance. It is only a matter of time before sustainable financing becomes the rule rather than the exception.
Drivers for progress and enablers for sustainable prosperity
Ideas and technology drive human progress. As we are learning that markets and the natural environment need to find a new balance, and as our entrepreneurial ingenuity is finding new and better ways to create value, we have the opportunity to build a new narrative that inspires hope and creativity. The big transformation that is currently reshaping decision making in the market place has the potential to inspire all players of society to realize the full potential of humanity’s aspirations.
For the good spirits to prevail and to avoid political fragmentation and rivalry making us repeat the mistakes of the past, it is now imperative to show how new businessmodels can be part of the solution. All over the world, people want to live in peace and prosperity while enjoying the beauty of nature. The big market transformation can become a unifier that focuses our energies on building a better future for all towards the UN 2030 goals. It also opens up new opportunities for collaboration across nations and regions. For example, many corporations in the United States share the understanding that decarbonization is the way to go, and in China, initiatives such as the Global Energy Interconnection are advancing the infrastructure required to do so. Our interdependent world needs more, not less cooperation.
Showing that sustainable businesses are winners
It is now crucial that policy makers embrace sustainable development as the new narrative and support the big transformation. For companies and investors, the challenge now is to bring the evidence that socially inclusive and environmentally friendly business models are winning. And citizens and consumers — by consciously applying their values when deciding how to invest or spend — have the ultimate power to make the great market transformation a foundation for our future.
This article was first published on the 3/2019 issue of the ECA Journal. The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors.