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Corporate sustainability must include nature of financing

Sustainable investing is based on environmental, social and governance ideals

“If a company wants to be serious in their battle for corporate sustainability, it needs to be aware of Sustainable Development Goals-linked finance,” says Prof Andreas Hoepner of UCD. “Sustainable development can be linked to bonds or loans, but basically it means that when a company gets financing, it’s committed to reaching SDG criteria – perhaps to reduce greenhouse gas emissions or to become more efficient in water consumption.

“If the company fails to reach such criteria, it may in turn be penalised in interest. However, by fulfilling its obligations, it can access finance more easily and at better rates. It’s a carrot-and-stick approach.”

Hoepner points out that the onus is on the company to be serious and disciplined in their approach.

“Companies have to walk the walk, not just talk the talk. I compare it to having an overweight friend who says they are going to go on a diet. It takes discipline and it will also be obvious if they are not following through.”

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Another push to ensure companies are kind to the planet lies with the workforce. GenZ and Millennials are very vocal when accessing the profile of a company. Older generations placed items like salary and health packages high up the desirability list, whereas the younger generations want to align with corporate culture, are keen to see value propositions and will steer away from companies with negative social reputations.

“Putting up a marketing policy is not enough anymore, either to attract cost-effective finance or talent,” says Hoepner.

Brian Haugh, head of BDO valuation and financial modelling centre, echoes this emphasis.

“Sustainable investing is generally defined as investing based on environmental, social and governance (ESG) principles, so it takes into consideration the impact of an investment on the environment, on society and also assessing the governance structures in place,” says Haugh.

It’s certainly a major area of focus for investors; the OECD estimates put the value of ESG investing at about $40 trillion in 2020 with ESG ratings applied to companies representing 80 per cent of global market capitalisation.

Altruistic motivations

“This increased scrutiny of ESG issues has put pressure on companies to disclose certain non-financial information about their activities that they may previously have preferred to keep private. Apart from any altruistic motivations, big business is having to show how it is becoming more sustainable because it is being measured on it through ESG ratings. The reporting and disclosure environment is found somewhat lacking at times due to inconsistencies and limitations of scope, however, recent developments such as the EU Taxonomy are helpful in creating a common benchmark against which to report on ESG activities.

“It’s important to remember that while ESG ratings are helpful in assessing a business’ sustainability this is merely a starting point; a truly sustainable investing strategy will require going beyond ratings to consider an investment holistically so as to capture aspects that are not covered in ESG reporting,” says Haugh, agreeing with the walk-the-walk exhortation.

Even when not looking directly for finance, Hoepner sees companies generally looking to reduce where practical and applicable their greenhouse gases.

“It’s important that companies operating in these sectors, energy, materials, utilities, industrial etc, reduce overall emissions. This can be done in a variety of ways from migration to renewable energy and introduction of more energy-efficient practices to eliminating wasteful actions such as gas flaring where energy companies literally burn redundant gases,” says Hoepner.

The latter practice still occurs and Hoepner compares it to the large supermarkets wasting food, although it must be acknowledged there are a number of CSR solutions combating the supermarket waste. Indeed, in France in 2016, a law was introduced forbidding supermarkets to destroy unsold food products and they were compelled to donate it instead.

Carbon removals

Carbon offsets are another way for companies to reduce their carbon footprint and help the planet, but again Hoepner argues it needs to be done in a regulated manner, through a regulated exchange.

“Otherwise, it may just be avoidances rather than offsets, with the company playing fast and loose with the facts and descending into Hocus Pocus. Purchasing carbon removals is four times as expensive as avoidances so again reputation is everything,” he says.

There are other simple ways for companies to be kind to the planet and one of these is to really look at the requirement of staff to be present in the office. While the government has encouraged a return to work alongside a right to remain remote, companies may decide to continue a hybrid model thereby giving more choices to their employees and also reducing commuting and energy consumption in many cases.

“Being kind to the planet requires real impact, not just lip service,” argues Hoepner. “Improve the consumption of energy, change to renewable alternatives and maybe get involved in real tree planting – although those latter activities will take years to come into being.”

One example of a groundbreaking impactful project to reward sustainable human behaviour and plant trees is the Art Forest programme in China. Set up in 2016 as part of the Alipay app, it encourages users to earn virtual points for making low-carbon lifestyle choices such as taking public transport or walking over private car usage. Since establishment, it has helped more than 600 million users plant more than 326 million trees and is helping in the reforestation of some of China’s most arid regions.