“Greed”, said Gordon Gekko, the villainous investment banker played by Michael Douglas in the 1987 film Wall Street, “is good”. He went on: “it clarifies, cuts through and captures the essence of the evolutionary spirit.”
Former Prime Minister Paul Keating put it another way: “In a two horse race, always back the one called self-interest”.
Those of us who work with companies to engage in the sustainability space often appeal to what might be termed enlightened self-interest. We talk about the benefits of the action: to reputation, to brand, to sales. Sometimes, these arguments are defensive: if you don’t act sustainably, you will lose your social licence to operate (or maybe even your legal licence). Sometimes, they are more positively framed: act sustainably, and you will benefit from an enhanced reputation, and an ability to charge motivated consumers more for your product or service.
But it has always been an uphill struggle, because the benefits are often indirect or intangible. It is hard to draw a direct link between operating in a more sustainable way, and financial reward. A company’s primary responsibility is to its shareholders. This is not just a general concept: it is a legal requirement. And until firms believe that aggressive action to reduce their environmental footprint is in their shareholders’ interest, there is a limit to the amount of resources they can devote to it. To put it another way: until there is a line of sight to a return on investment, efforts to minimise environmental impact will not, for the majority of companies, be a core focus.
The good news is that this line of sight is coming. There is an increasing body of evidence to suggest that, at least in specific industries and specific areas of sustainability, there is an increasingly a direct link between investment in sustainability and shareholder value.
Last week, the Carbon Disclosure Project (CDP) – a partner of OgilvyEarth – released its annual ‘Global 500’ climate change report, an analysis of climate change disclosures made through CDP by the 500 largest listed companies in world, on behalf of 655 investors with assets of USD$78 trillion. That such a large number of institutional investors want to know this information is encouraging enough, but one particular finding – almost buried in the report – was particularly telling. This is that the 33 companies identified by CDP as ‘carbon performance leaders’ among the Global 500 outperform the others.
And not by a little bit. The companies that make up the ‘Carbon Performance Leadership Index’ delivered more than double the average returns of than companies outside the leadership subset. For the financially-minded among you, ‘return’ includes interest, capital gains, dividends and distributions (full details in the report).
For companies, this is the line of sight to a return on investment. This is self-interest writ large, naked and uncompromising. Hallelujah!
Of course, equity market performance is influenced by a broad range of factors, of which carbon management is but one. It is one thing to find a correlation, and another to find causality. I am not suggesting that improved carbon management will cause a company’s share price to go up (and you should certainly not run off and make investment decisions based on this column…). But the findings do show that good carbon management has, for most of the past two years, been associated with significantly above-average market performance.
Part of this may be because investors are increasingly pricing in the financial risk to a company from climate change (or at least from energy prices) and are seeking to reallocate assets to minimise exposure to these risks. Part of this may be because companies that manage carbon risks well, also happen to manage other risks well. And part of this may be because good carbon management strategies may be a proxy for good management overall.
This merits further analysis. But for now, those of us who want to see companies reduce emissions and drive sustainable business practices should revel in this finding. Nothing focuses a company’s mind like its return to investors. And it is increasingly looking like companies that do a good job of disclosing and reducing their emissions, return more money to investors.
The CDP study is not alone. In June this year, Deutsche Bank conducted a meta-study: a global assessment of over one hundred studies that sought to ascertain whether companies with high ratings for Environmental, Social and Governance (ESG) factors performed better than their peers. The results were striking: 89% of studies showed that companies with strong ESG credentials exhibited market-based outperformance. Further, every single one of the more than 100 studies indicated that companies with high ratings for ESG have a lower cost of capital. In the words of Deutsche Bank, “the market recognizes that these companies have a lower risk than other companies and rewards them accordingly.”
It is not surprising that investors are more and more interested in the sustainability performance of companies. The Investor Group on Climate Change Australia/New Zealand represents institutional investors with total funds under management of approximately $900 billion, with the aim of encouraging government policies and investment practices that address the risks and opportunities of climate change, for the ultimate benefit of investors, such as super funds. It is from investors like these that the real impetus for companies to reduce their environmental impact will come from.
“Greed” said Gekko, “in all its forms, greed for money, for love, for knowledge, has marked the upward surge of mankind”.
Call it greed, call it enlightened self-interest – the fact is that it appears that companies that put more into reducing their environmental impact, make more money. That is the ultimate motivator. It is a finding even Gordon Gekko can agree with.
Andrew Ure is Managing Director of OgilvyEarth, the sustainability practice of Ogilvy Public Relations. www.ogilvyearth.com.au