Sustainable Companies Protect the Planet and Perform Better

• Climate change poses a major risk to companies and the planet
• There are challenges with reporting on sustainability that need to be overcome
• Companies that make positive changes will be rewarded

Sustainability is a Tool to Fight Climate Change

BlackRock’s CEO, Larry Fink, has said that climate change poses the biggest risk to our way of life. The impacts of climate change will reshape the world of finance. Fink said that the move towards sustainability would cause “in the near future … a significant reallocation of capital.” This reallocation will move money towards companies that are working to solve global problems like climate change. 

Many investors and asset managers are changing how they operate. They are putting sustainability at the center of their investment approach. Companies that focus on making the world a better place perform better than those that do not. 

Sustainability Does Have Its Problems

Many companies still use sustainability as a greenwashing tool. Greenwashing means that they support social causes with their foundations, plant trees or do community cleanups, and publicize only their positive actions all to make themselves look good. Going forward, companies can no longer hide behind greenwashing. If changes are not made and sustainability not taken seriously, then consumers will judge the company, and stock prices will take a hit. No longer will they be able to pay lip-service to sustainability. 

Improving the way that companies report on sustainability is critical. Often companies have inadequate reporting because their reporting is unreliable, inconsistent, and immaterial (Why ESG Fails). The way one company reports its environmental and social impact also tends to be very different from other companies choose to do it. To fix these problems, there are efforts to standardize reporting across industries. For example, the Sustainability Accounting Standards has determined a method to report on the most material, social issues. Physis has a detailed blog on sustainability reporting.

Sustainability Provides Rewards

When a company makes an effort to be more sustainable, the market responds. A study completed by the Strategic Investors Initiative found that investors do care about the long term plans of companies. Companies that plan for the long term prove they care for society and the environment. These companies differentiate themselves and become market leaders. 

There are many examples of where this is the case. In the United States, Walmart raised entry-level wages, and this lead to a decline in turnover while increasing productivity. In India, Novartis brought health education to rural villages, which opened up a new market of 70 million potential customers. PayPal developed a program to provide financing to small businesses with low credit scores, and they created a $10 billion market opportunity that has expanded their business.

The above examples show how there is a direct link between the economic performance of a company and its positive contribution to society. The different worlds of finance, investor relations, and sustainability are all coming together. 

Sources:

A Fundamental Reshaping of Finance – Larry Fink, BlackRock CEO

Larry Fink Isn’t Going to Read Your Sustainability Report

The Economic Significance of Long-Term Plans

Why ESG Fails