Sustainability is a very frequent topic in international financial publications. In the Czech Republic, it’s usually looked upon as some kind of hobby for a handful of naive enthusiasts, but that depends on whom you’re talking to. The younger that person is, the more likely they are to prefer sustainability even at the expense of other criteria such as profitability or absolute growth.
Not everyone realizes that ecology isn’t the only thing meant by sustainability. A related term, ESG, stands for “Environmental, Social, and Governance”, meaning not only the ecological sustainability of what individual companies do or don’t do when manufacturing and distributing their products and services, but also social sustainability and good risk management.
As part of social sustainability, investors want to know how coherent and ethical company culture is, to what extent women and ethnic minorities are represented, how companies develop and are capable of holding on to talented employees, whether they support local communities, and whether their marketing and advertising policies provide a fair and authentic view of their products. If this seems a little too #MeToo or #BLM – an abbreviation not especially relevant in the Czech Republic – talk to anyone who has tried to recruit and hold on to employees working in bottleneck occupations here, for example skilled programmers or young lawyers (in both cases of both genders). It’s not just about money; actually, it’s not just about money at all. They have to feel comfortable at work, they have to look forward to coming in. The crisis has afflicted various groups of the population with brutal inequality, has resulted in excessive growth in unemployment among women, and has further exacerbated social inequality. This doesn’t apply to us, you say? The growth of populism and nationalism in democratic societies affects everyone. Our government and its policies are a reflection of these social pressures.
And what about that last word, governance? Corporate governance is the collection of mechanisms, processes and relations used by various parties to control and to operate a corporation. This includes how effectively and transparently a company is managed, how it treats its shareholders, whether it pays everyone equal wages for equal work, how it manages risks such as dependence on Chinese imports or possible data leaks and cyber-attacks. During the spring, these topics gained new significance. Even now, Europe is still dealing with production stoppages that took place on the other side of the planet in January or February.
Over the course of the last ten years, investors have made much progress in how they measure and check claims of sustainability in their companies. Lufthansa Innovation Hub thus absolutely demolished an announcement by Voi, a Scandinavian electrical scooter operator, about how many tonnes of carbon emissions their scooters produce, and forced them to rework their supply chain, accent local production, and increase battery efficiency. Norssken, a Swedish foundation started by Klarna founder Niklas Adalberth, manages the largest European venture fund focused on ESG investing. The fund requires an external expert calculation for every sustainability claim made by start-ups into which it intends to invest, and has created a comprehensive set of financial criteria for investment. So mere nice words evidently aren’t enough.
According to Swiss bank UBS, 39 % of all family offices plan to invest most of their portfolio sustainably over the next five years. This is not just because younger members of wealthy American or European families – Millennials and Gen-Z – are often more environmentally and socially focused than previous generations. It’s also because long-term family portfolios must address hitherto unknown costs of increased risk. Will, for example, “traditional” companies in the portfolio be forced to make significant expenditures to reduce emissions? Will costs increase due to regulation? Or due to hackers?
Though interest in ESG investing has experienced a massive increase, there are few investment opportunities on the market, especially for very sophisticated investors who want to make fundamental changes in their entire portfolio. Large asset managers are receiving more and more questions from their clients on how to increase ESG investment. The value of companies that will be able to demonstrate sustainability will rise.
Despite the global pandemic, according to Morningstar, in Q2 of this year assets invested worldwide into funds that focus solely on sustainable projects grew to a record $ 1 trillion. During the same period, assets in all investment funds grew to $ 35 trillion. For the time being, sustainable investments therefore make up less than 3 %. But if 40 % of investors want to invest their money into sustainability, there will be a big fight over it.
Legal & General Investment Management, the UK’s largest asset manager, with $ 1.5 trillion in assets under management, assesses the sustainability of more than a thousand companies. In October, it threatened to publish the names of about five hundred of them, accompanied by relevant criticism, if they don’t start doing more in the area of ESG. And if that doesn’t help, it will issue instructions to sell their shares from its portfolios, with all attendant consequences.
It’s enough to just understand the principle of supply and demand. Then it’s clear why the share prices of companies that are engaged in brutal clearing of rain forests in the Amazon, employ children under degrading conditions, or are suspected of being unable to protect their customers’ data, are falling. That which a a few short years ago was looked upon merely as an admirable activity is now having a quite fundamental effect on companies’ very existence. Sustainability is becoming a “must have” part of business – and the price of shares that everyone must have growing, and won’t stop growing any time soon.
