Green Finance

Green Finance Briefing: Sustainability is now a top 5 corporate priority

  • Board members and investors are demanding greater accountability around sustainability, and CEOs are feeling pressured to start employing sustainable strategies.
  • The past year has seen a dramatic increase in interest in environment-related issues – it is now the third-most important external factor that executives are taking into account.
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Green Finance Briefing: Sustainability is now a top 5 corporate priority

Tearsheet’s Green Finance Briefing brings you Outlier member exclusive bi-weekly content with critical insights, research and articles about the intersection of finance and the environment. To sign up for an Outlier membership, click here.

You can also sign up for the free Green Finance newsletter to stay in the loop on the finance industry’s path towards sustainability. We’ll be in your inbox every other week, sharing our latest coverage along with trends and resources from the wider industry.

Execs are prioritizing sustainability, but execution remains challenging

Sustainability is quickly rising through the ranks to represent a core value on the corporate agenda – consumers are increasingly becoming climate-conscious, and stakeholders want the companies they’ve invested in to start changing their practices towards truly becoming sustainable. 

But what does “sustainable” really mean? A general definition suggests a long-term perspective guided by an awareness of finite available resources that should be used responsibly.

This is starkly different from the short-term capitalist model that has dominated the past few decades – such a shift is not an easy feat. And executives in charge of seeing this through are literally…feeling the heat.

Board members and investors are demanding greater transparency and accountability around sustainability, which has become executives’ greatest organizational challenge, according to an IBM study that interviewed 3,000 CEOs worldwide.

“CEOs feel increasing pressure to act—from all manner of stakeholders, many of whom are losing patience, frustrated by what they view as all talk and no action,” the report argued.

Historically, environmental factors were at the bottom of the priority list – IBM has been conducting this study since 2004, and this sudden change of mind was only matched by the surging interest in technology seen in 2004-2012. 

Technological factors remain the biggest focus for the third year in a row, followed by regulatory concerns, which likely include changing sustainability requirements as well.

So interest is high, but what about taking action? Turns out that investments in sustainability strategies have grown significantly – as a percentage of revenue, these have doubled over the past five years, according to IBM. But when it comes to execution, the majority of executives are either still piloting or implementing only parts of their strategy.

A big challenge in implementing sustainability actions is that executives are unclear about the financial benefits this would bring. What would be the return on investment here? Difficult to put into numbers, as nearly half of the executives note that there’s also a big lack of insights from data. 

“We need the financial systems to appropriately reflect the environmental cost of things we do so we can make the right decision. Ultimately, we have to allocate resources, and that’s hard if the metrics don’t align with reality,” said David Kenny, CEO of Nielsen, an American information, data, and market measurement firm.

These waters are understandably confusing to navigate, especially when you also get mixed signals from different actors in the market.

For example, the study found that almost 60% of CEOs feel strong pressure from investors, but only a quarter say their sustainability efforts make it easier to raise capital. 

There are also issues around accessing talent – while most consumers say they are more likely to accept a job with an organization they consider to be environmentally sustainable, only 20% of CEOs reported that their sustainability efforts helped them recruit talent.

These are some of the reasons why the majority of executives (72%) are taking an operational or compliance approach to sustainability, meaning that they focus on operational efficiencies and make sustainability investments in core business areas, some just to meet compliance and regulatory requirements. 

Meanwhile, there’s also a 13% minority of executives who see sustainability as a once-in-a-career opportunity to change for the better – they are driven by purpose and see this as a personal responsibility. They support open innovation and also engage ecosystem partners to advance sustainability efforts.

Moreover, these executives are also the most confident that their digital infrastructure enables new technology investments to efficiently scale and deliver value. And aligning sustainability and digital transformation efforts is proving to be quite a fruitful strategy. 

Organizations that have a clearly defined sustainability strategy and the right digital capabilities in place report up to 41% higher revenue growth compared to their peers who have not aligned these efforts.

This signals that having a holistic approach and advancing both sustainability and digital capabilities can truly reshape a business. But this is indeed easier to achieve for newer corporations than legacy players, for example. 

But if the pandemic taught us anything, it’s that we can adapt quickly if the right incentives are there – and maybe things are finally falling into place for us to engage in sustainable capitalism. After all, what’s the alternative?

Chart of the week

With ESG quickly moving into the mainstream, the global market for ESG data is also in high demand. This has been driven by investment funds increasingly wanting to incorporate risks into their strategies, as well as the emergence of new regulatory requirements. 

Analysis by management consultancy Opimas found that the ESG data market surpassed $1 billion for the first time in 2021, having recorded a 28% annual growth rate over the past five years. 

Around 70% of the market is made up of ESG research and analytics, which includes ESG ratings, raw data, and other dedicated solutions. The remaining 30% goes to ESG indices, which met faster growth due to the broad success of ETFs and the global increase in the number of indices. 

Source: Opimas

However, the market is highly concentrated, with 68% controlled by four providers: MSCI, ISS ESG, Sustainalytics, and S&P Global. But the large number of smaller participants and new market entrants could be a sign of possible future disruption, Opimas said.

Quote of the week 

“I used to think the top global environmental problems were biodiversity loss, ecosystem collapse, and climate change. I thought with 30 years of good science we could address those problems, but I was wrong. The top environmental problems are selfishness, greed and apathy – and to deal with these we need a spiritual and cultural transformation, and we scientists don’t know how to do that.”

Gus Speth, American environmental lawyer and co-founder of the Natural Resources Defense Council

What we’re writing

Green Finance Briefing: US banks vote to continue fossil fuel financing

Proposals to stop fossil fuel financing at major US banks were rejected by the majority of shareholders, but the initiatives hope to gain more ground next year.

CarbonPay launches payment card to help businesses automatically offset their carbon footprint

Sustainability-focused fintech CarbonPay has launched its first product, a prepaid corporate card offering, aiming to create products that enable organizations of all sizes to reach their climate goals.

The ESG mirage: More about the hype than values

ESG is growing increasingly popular, but the unregulated world of sustainable investments is not always what it’s cracked up to be.

Wall Street is running out of time for bold climate action

Big banks are making climate pledges, but more bold actions are needed in order to avoid the worst global warming scenarios, according to a new report by the IPCC.

What we’re reading 

Remuneration and diversity under the microscope at AGMs (ESG Specialist)

Financial firms face $225 billion in water-related losses, analysis estimates (Reuters)

There’s a new way to measure a company’s climate risk (Bloomberg)

American Express files for inaugural $1 billion sustainability bond issuance (ESG Today)

A carbon tax lets markets lead the fight against climate change (WSJ)

EU plans 10x scale-up in hydrogen capacity by 2025 (ESG Today)

Climate activists take aim at Barclays, StanChart shareholder meetings (Reuters)

The secret life of ESG ratings (Green Biz)

Sustainable bonds poised for growth, but standards remain a potential bottleneck (ESG Specialist)

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