The government policies needed to take the world to a sustainable, green economy have become gridlocked, leaving ample opportunities for businesses to the take the lead, said sustainability experts in Singapore on Tuesday.
Chief of sustainable consumption and production for the United Nations Environment Programme (UNEP), Dr Arab Hoballah, said that the issues of climate change and a green economy had become extremely politicised, but that one issue showed the community was evolving. Speaking on a panel at a green business summit hosted by financial data provider and media group Bloomberg, he was referring to global recognition that society had to change its consumption and production patterns.
“Accusing people (of over-consuming) does not help…We have to find ways of getting them to consume sustainably,” he noted. He added that the global community needed greater awareness of the many lost opportunities for resource efficiency in sectors such as building and construction: “We are just losing energy and money. It’s stupidity,” he said.
His remarks came at the same time that International Energy Agency chief economist Dr Fatih Birol, speaking at the Asian launch in Singapore of the World Energy Outlook 2012 report, said that in the “absence of a concerted policy push, two-thirds of the economically-viable potential to improve energy efficiency will remain unrealised through to 2035”.
Dr Hoballah said that all sectors would have to work together to achieve the shift to sustainability and that no group could do it alone. Regarding corporate efforts, he noted that he sees a few large companies “effectively doing things right”, but that it remained to be seen if the benefits would trickle down the supply chain to the small and medium –sized companies that were lagging.
Global head of sustainability for Bloomberg, Curtis Ravenel, told Eco-Business on the sidelines of the event that the business sector, which includes about 1,000 multinationals that “essentially control the world economy”, had to take the lead. “We’re not going to get (the action we need) from policy anytime soon,” he added.
The reason both business and policy have thus far failed is that markets lack good information and the right price signals to act on that information, he noted.
Yet, he remains hopeful because in his business – where information is a commodity – he sees huge demand for new types of data: “Analysts, asset owners and fund managers are desperate to get new insight into what makes a company tick,” he said.
The financial information typically included in corporate reports accounts for only 30 per cent of value of a company, and the rest are intangibles such as supply chain management, environmental risks, intellectual property and human resources, he added.
For example, direct financial costs for a company’s employee turnover show up in the human resource budget, but the significant losses from lost productivity do not appear anywhere on a profit and loss statement.
Bloomberg calls such indirect costs stranded assets, and is looking for ways to capture their value, noted Mr Ravenel.
The company is helping an investment firm called Generation Investment Management – run by former US vice-president Al Gore and former chief executive of Goldman Sachs Asset Management David Blood – to build a new tool to integrate the currently external costs of ESG impacts in a way that businesses can understand.
In the meantime, awareness of corporate environmental, social and governance (ESG) issues within the mainstream financial community is skyrocketing due in part to rising pressure on firms to report on sustainability issues.
In 2008, Bloomberg started including ESG information to clients alongside financial data, which put the results from such initiatives as the Carbon Disclosure Project, the Global Reporting Initiative and the UN Global Compact squarely on the screens of the financial community.
“Just by introducing the function on people’s screens - like a grocery store putting food at eye level -awareness of ESG issues among mainstream users today is 400 per cent higher than it was four years ago,” he noted.
Money talks
The next step is figuring out how the financial community can use the information. Mr Ravenel cited a Harvard Business Review study by Professor Robert Eccles which found that firms that strategically incorporate good EGS practices over long run outperform their peers.
“If we can demonstrate to the financial community that using sustainability information could improve their long term prospects and values…the financial community will simply demand that industry change,” he said.
He predicts that capital will flow to the companies that demonstrate they are positioning themselves for a greener, more transparent economy. “It will flee from the low performers. This is the greatest fear of all for companies,” he said.
Another big driver, which created monumental change in the last year, is the UN Principles for Responsible Investment (PRI), Mr Ravenel noted.
More than 1,100 financial institutions and service providers have joined the PRI network of investors and committed to integrating ESG issues into investment decisions. Together, these groups controlled about US$ 30 trillion in assets as of April, according to the PRI website.
Mr Ravenel said that PRI members are now actively competing with each other to find better ways of addressing ESG issues and that, collectively, they are pushing the finance industry towards a tipping point by demanding better ESG information and putting it to work.
Other initiatives aim to scale up sustainability reporting by making it mandatory for publicly listed companies. At last summer’s global sustainability summit in Rio de Janeiro, representatives from many of the world’s stock exchanges lobbied for mandatory disclosure of non-financial sustainability related information.
However, a study of some of the resulting stock exchange measures from independent research firm Verdantix found that new guidelines and regulations had had limited impact, with few consequences for companies that did not comply. Furthermore, some of the largest exchanges – including NASDAQ and NYSE – have not come on board.
“Were stock exchanges to mandate ESG disclosures and enforce the rules with the threat of de-listing non-compliant firms, the CFOs and Investor Relations Directors would no longer be able to dodge the bullet and would be forced to a get a grip on their ESG performance and disclosures,” said Verdantix chief executive David Metcalfe in an email interview.
He added that while the stock exchange requirements and the PRI initiative would certainly increase pressure on companies to provide ESG information, he had his doubts that the bulk of investors would ever consider ESG, non-financial or long-term indicators as part of the investment process.
First, the business case
With or without pressure from investors, companies are increasingly recognising the business benefits of sustainable practices.
Asian president of consumer goods firm Procter & Gamble (P&G), Hatsunori Kiriyama, noted at the Green Business Summit that his company’s sustainability efforts had resulted in more than US$1 billion in costs savings over the past 10 years.
By setting and publishing sustainability goals that were ambitious yet achievable – in the same way the firm sets its financial goals – P&G was motivated to innovate more sustainable solutions, he said. However, to achieve economies of scale by manufacturing for global markets, companies needed governments to help establish standardised policies and regulations, he added.
Bloomberg’s Mr Ravenel noted that the sharing of case studies such as P&G’s was one area where industry can collude, but that they must start with the business benefits first.
His firm, which in recent years has achieved energy savings worth US$50 million, used to justify its sustainability projects by first saying it was the right thing to do and later saying it made sense economically. But now his team kicks off with the business argument. “You’re going to lose half the audience if you try to moralise,” he said.
Most environmental impacts involve some sort of waste or ineffiency, which nearly always indicates a financial opportunity, he added.
“The idea of there being a trade-off between managing things environmentally and business profits is a complete fallacy,” noted Mr Ravenel.
