As we get closer to momentous the UN’s momentous Climate Change Conference, COP 21, it feels that we are in a new phase of urgency and responsibility.
For the first time in the UN’s history, world leaders have acknowledged the limits of their powers in delivering to such far-reaching targets. From Washington to Wellington, governments understand that they alone cannot implement the Sustainable Development Goals. They are welcoming and actively encouraging private sector engagement to help shape a more sustainable world.
But is the private sector ready in turn to play its part? Will corporations and investors make the necessary changes to embrace change?
First, let’s be clear. All of the main actors in the private sector should have an interest in seeing global sustainable development succeed. As markets have become increasingly globalized whilst governments have remained local, our international economic system is now more interdependent than at any point in history. As a result, corporations and investors now increasingly realise that their ability to prosper and grow depends on the health of societies where they operate.
And indeed, within the real-world economy there is a silent revolution transforming how the corporation now conducts itself. A growing number of companies are embarking on a fundamental change of strategy, joining a movement that started its journey almost two decades ago. Environmental, social and governance (ESG) issues such as social inclusion, water stewardship, climate action and anti-corruption are no longer seen as external to the corporation. Such issues have taken on material relevance for risk management, for cost of capital, for innovation and growth.
The UN Global Compact, an early staging post on this ESG journey and a pioneer of the modern corporate sustainability movement, now counts over 8,000 corporate signatures from 160 countries. These companies are all at various stages of integrating ESG into business strategy and operations and by doing so, they are critically contributing to the implementation of the Sustainable Development Goals.
ESG performance is increasingly being measured as part of overall corporate performance, with ever more annual disclosure through integrated reporting. Corporations are now pooling efforts and resources around specific themes that correspond to the Sustainable Development Goals, working in partnership together and through government collaboration. And whilst many of these efforts have been driven by global sustainability leaders, there is also a clear and growing grassroots movement underway. This is being demonstrated not least by the fact that the UN Global Compact operates through over 90 Local Networks where hundreds of initiatives and projects in direct support of the Sustainable Development Goals are underway.
But although many corporations understand the material importance of sustainability, the movement has not yet fully gone mainstream. Too many companies remain agnostic when it comes to ESG issues, choosing instead to pursue exclusively short-term returns and remaining in thrall to shareholder value.
On the investor side, asset owners still outsource responsibilities to managers under pressure to meet quarterly earnings. Evidence around the material relevance of ESG in the investment process continues to be ignored by too many.
Whilst global sustainable assets have been estimated to total USD $21.4 trillion as of 2014, the proportion of socially responsible investment — as defined by the Global Sustainable Development Alliance in their 2014 report — stands at just over 30% of all professionally managed assets worldwide. The road ahead remains long.
The prevalence of short-termism across financial markets, coupled with inadequate governance in many parts of the world, are two of the key barriers that continue to hold back the corporate world from being fully engaged with the global sustainability agenda.
In Paris next month, however, comes a real opportunity for change for the private sector.
For corporate sustainability is not idealism, but a new reality which underpins the growth and development of our capital markets from today onwards. It is here to stay, and will be propelled by long-term mega trends.
Firstly, technology and transparency are increasingly putting a premium on disclosure. Hiding dark secrets in the chain value or in product design is now commonly viewed not just as bad practice but also as bad strategy, financially detrimental in both the short and long term. As costs for accessing and processing ESG information decline further, robust benchmarks and measurements will further influence corporate valuation which in turn will drive performance improvements in these areas.
Secondly, business now has a huge stake in issues that until recently were seen as relevant only to the public domain. Water stewardship in an era of scarcity and pricing carbon emissions to account for negative externalities are just two examples that show the role of business, either as part of the problem or part of the solution.
Third, as economic growth has migrated and business has globalized, foreign direct investment has undergone a paradigm shift. Until recently the main motivation has been access to cheap resources either in the form of low labor costs or natural resources. Today, the key motivation is increasingly to grow with the market over time. This means business has an interest to overcome growth barriers and focus instead on long term value creation. Developing the business in alignment with societal priorities.
And if we look around, the world of finance is on the move. Foundations and innovative mechanisms such as green bonds and themed impact investment are advancing the sustainable development agenda.
Driven by pension funds, insurance companies and similar institutional investors whose fiduciary responsibility is long-term stewardship, the gap with the real economy is being closed. The UN-backed Principles for Responsible Investment (PRI) now counts over 1,300 participants, representing over US$ 45 trillion. It continues to grow.
By integrating ESG into investment analysis into decision-making, the world of finance is slowly aligning with the sustainable development agenda. A particularly exciting development is the emergence of a new generation of asset managers that understand how to leverage ESG data not just to reduce risk but also to actively enhance performance. Among them, Arabesque, the world’s first ESG Quant fund.
As empirical evidence continues to show that companies with sound sustainability performance also produce superior returns over time, we are now witnessing the shift of sophisticated quantitative investment strategies into the world of ESG. Cutting edge financial technologies fusing with sustainability analysis to achieve strong returns.
By demonstrating that responsibility and profitability are not incompatible, but in fact wholly complementary, the movement truly will take hold. It is a future where financial performance, environmental stewardship, social responsibility and good governance go hand in hand, for the benefit of all stakeholders.
In succeeding, we can unlock trillions of assets to tackle societal priorities and usher in a new era of genuine sustainable change. This is the big bet of the 2030 agenda. And it may just work.
Georg Kell, founder of the UN Global Compact and Vice Chairman of Arabesque Partners.
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