Greater Expectations: Rethinking investment towards a sustainable future
Progress towards a green and sustainable economy is way too slow and our perspectives on investment will need to undergo a radical shift if we are to give our businesses the right conditions in which they can deliver a truly prosperous future, says Michael Townsend.
Despite some good work by a few leading lights, businesses around the globe are struggling to make progress on sustainability.
The 2014 State of Green Business report reveals little meaningful progress across a range of metrics, including greenhouse gas emissions, water use, waste disposal and other pollutant impacts.
The underlying challenge is that most CEOs admit they are struggling to make the business case for long-term investments. The problem, they believe, is that key influencers – such as consumers, governments and investors – are failing to provide them with the incentives and signals they so badly need.
Moreover, the latest exclusive report by edie and Sustainable Business – Energy managers: Procurement, planning and purchasing priorities 2014/15 – reveals that the majority of energy managers (67%) consider funding to be the greatest barrier to initiating energy-saving programmes.
Investment is key, but it seems we are getting stuck when it comes to investing in a long-term sustainable future. Perhaps it is time to raise our expectations of financial capital and how we can best use it.
Mind the investment gap
Lord Stern put forward the compelling economic case for climate change back in 2006. He has since upgraded his views; urging us to reinvest 2% of GDP each year if we are to deal with the worst impacts of climate change.
Translating this for each of our businesses, we should be reinvesting 2%+ of annual sales revenue. And with the full range of challenges we face – in moving towards a low-carbon and sustainable economy – we will, most likely, need even greater levels of reinvestment.
In practice, it is very hard to evaluate where we are in terms of the scale and maturity of sustainable business investment. Even the most progressive businesses are wary of providing complete transparency.
We do know there are significant concerns over companies’ general long-term reinvestment plans. As Laurence Fink, CEO of BlackRock – the world’s largest asset manager – recently warned: “Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.” Living for today seems to have become the maxim in business.
Of course, it is not just a case of throwing money at the challenge – we still have to invest wisely – but we do know that we cannot carry on with business as usual and also, quite reassuringly, we can see that sustainability-focused companies significantly outperform conventional firms, in both stock market and accounting performance.
It should be a no-brainer, but there is a strong sense that we are way behind where we need to be in transforming our businesses and economies.
The lack of good investment is a huge problem; not just for people and planet, but also for the continued performance of our investments and pensions. The more money we have tied up in stranded assets (unsustainable businesses), the bigger the risk to long-term economic prosperity.
There are plenty of historical precedents for what happens to businesses that fail to reinvest adequately – and we can only start to imagine the commercial carnage we will experience for companies that fail to invest in a sustainable future.
Transforming our businesses and economies is vital. So, why are companies failing to invest?
Positions are polarised. On the one hand, many corporate businesses are sitting on record levels of cash – apparently lacking confidence or vision to reinvest – and certainly not in making the necessary transition towards a sustainable future. Let’s hope this is a temporary aberration as economic constraints ease up, at least in the short-term.
Many other businesses experience the opposite condition, encumbered with record levels of debt. Although the level of corporate debt is falling in the UK – from a peak of 110% of GDP at the start of 2009 to 95% at the end of last year – some of that reduction is attributed to the writing-off of reckless lending by banks to property companies.
But a good deal of it is an unhealthy reluctance of banks to lend to viable companies, coupled with an understandable reluctance of many companies to borrow in support of their expansion plans.
So, how can we break the reinvestment deadlock?
Firstly, we need to reframe the business case and purpose for reinvestment.
Through a conventional lens, sustainable business investment decisions are based on the potential to drive revenue growth from ‘greener’ products, improved profit margins through resource productivity, and from de-risking the business from potential long-term shocks.
And, driven by the need for quick results, we tend to focus on low-risk projects with rapid payback – the ‘low hanging fruit’. But one third of respondents (33%) to edie’s recent survey of energy managers believe that all of this quick and low investment activity has already been completed. With increasingly visceral challenges afoot – as we enter the perfect storm of climate change, a looming energy crisis, increasing resource scarcity and economic re-structuring – we will need to get much more radical in our business plans and in our reinvestment decisions.
In many cases, this will mean a complete redesign of our businesses, rather than incremental changes, to be fit for the 21st century – focused on purpose; on creating ‘thick value’ for citizens, optimising growth and consumption, earning a living return, and based on shared ownership and living wealth. The true framing of our reinvestment business case is all about business transformation. To shape this will require vision, wisdom and bold decisions – true leadership.
But, there is a further fault line in our conventional framing of the investment case – our assumptions about growth.
We chase growth because of our continued need to deliver returns on financial capital – and without growth our debt-based system of capitalism collapses.
If we are to invest in sustainability, or anything else for that matter, we are effectively creating a debt that needs to be repaid in full, along with the cost of borrowing – whether as a direct loan or in meeting our own internal rate of return.
We then need to find enough income, in our various markets, to cover our debt and interest, as well as contribute towards our operational costs, overheads and profit.
But, going forward, the pursuit of growth may be increasingly challenging for us – not just in an economic sense, because of our debt overhang – but because of the very real limits to growth on our finite planet. Even if we optimise our eco-efficiency and circular economy initiatives, we may not fully de-couple resources from growth. In most cases we will need to take the ‘de-growth’ challenge seriously.
With growth under threat, this will further heighten our concerns over our ability to meet any future investment (debt) repayment commitments and will naturally dampen our desire to take on further borrowing. We then become even more risk averse and unwilling to reinvest in transformation.
For any business, facing the reality of a zero or low-growth scenario – whether through choice or necessity – will be necessary to shift our financial system away from the need for continuous growth and debt-based finance. Otherwise, we will face business and economic collapse, as well as environmental disaster.
Although a major challenge, this is still very much Mission Possible. At a macro level, Peter Victor shows us how to manage without growth. Through his groundbreaking economic modelling – originally calibrated on the Canadian Economy – Victor shows us how income growth can reduce to less than 0.1% each year, without compromising economic and social stability. He proposes a range of key policy interventions, including population management, reducing our consumption, reducing/sharing our working hours, taxation and realigning investment.
Tim Jackson follows up with his model for prosperity without growth, augmented by a focus on creating secure livelihoods, distributional equity, sustainable levels of resource throughput, and the protection of critical natural capital. A key part of this approach is about realigning investment towards ecological investment.
This shift is also possible at company level. But, for businesses to be allowed to operate on a low-growth platform, we also need all our investors to be aligned with the right expectations and behaviours.
First and foremost, we need to address our addiction for maximising short-term returns. Barton and Wiseman offer useful guidance to help asset owners move from ‘value-destroying short-termism’ to a focus on the long-term interests of their capital. This includes appropriate governance to support long-term behaviours along with long-term metrics in order to change the investor-management conversation.
Environmental, Social and Governance (ESG) metrics are becoming increasingly important within investment decisions – to better inform both business executives and investors on the interactions between different forms of value and capital, and where financial risks may lie.
The key underpinning philosophy is that we can’t manage what we don’t measure. These approaches also point towards the true cost of ownership of our businesses and our actions – taking all relevant factors into account.
ESG metrics – however imperfect or incomplete – are developing and aggregating data at a rapid pace. Max Rutten cites Bloomberg’s ESG’s database – which now comprises 300+ ESG data points on 10,000 public companies and increasingly on private companies.
And there are new analytical tools and services that integrate ESG risk measures with traditional Wall Street metrics. StockSmart, a FinTech company in the US, is creating a unified system, which provides companies with a single grade – ‘A’ through to ‘F’ – by which we can measure the true investment potential of each case.
The idea is to increase the degree to which sustainability is considered in money management and, through greater transparency, to enable all investors to become responsible by default and thereby avoid the risk of low performing and stranded assets. There will be no hiding place – data will be collated through real-time algorithms.
This level of visibility is important – not just a theoretical exercise – as investors are already starting to divest from holdings where they see long-term risks and issues.
Only last week in the US, Portland city officials announced that they have ceased to invest in Walmart – the world’s largest retailer – due to their newly adopted socially responsible investment criteria, which demonstrate the mega-retailer is ‘not a socially responsible company’. This means that the City’s $36m investment in Walmart will be reduced to zero by 2016.
Pension funds and other institutional investors are also beginning to rethink the threats posed by climate change and are discovering a desire to move away from stranded fossil fuel assets. BlackRock, the world’s biggest fund manager, recently teamed up with FTSE Group to help investors avoid coal, oil and gas companies without putting their money at risk.
While ESG metrics possess game-changing potential, John Fullerton, founder and president of the Capital Institute, urges caution. “Even some leading practitioners of ESG and sustainable investment acknowledge that ESG is primarily a risk mitigation strategy for financial investment portfolios, rather than a transformational strategy for the real economy,” he says.
He may well be right. Even with the careful injection of ESG metrics, incorporating a more holistic consideration of long-term business risk and value, the fundamental problem is that many of our business strategies are still hardwired for the narrow pursuit of profit maximisation. We could still be missing the point – and should perhaps take a broader view.
A similar challenge could also be levelled at the concept of Natural Capital. It may be that if we assign pounds and dollars to nature, the incumbents in the world of business and economics will start valuing – if not fully appreciating – our natural world and as a result start modifying their behaviours towards more sustainable business decisions.
But surely our eco-systems – without which there is no economy – are beyond price? Rather than trying to force an artificial marriage between the real, natural world and the man-made construct of capital, perhaps we should put the horse back in front of the cart, and develop an economic model that better aligns with and supports our natural world: where the primary purpose of business is to serve life?
Wealth and purpose
We could start by reframing our ambitions for wealth. David Korten urges us to recognise the difference between real living wealth and phantom financial wealth – a very interesting and insightful division – and worthy of much reflection.
Money, he reminds us, is simply a number entered on an accounting ledger; it has no intrinsic value, and can disappear in an instant, as we have all seen during and since the financial crash. We all know that money was originally intended as a means of exchange, but in many cases it has now become the end goal. We need to turn this around.
Real wealth, on the other hand, has intrinsic value – whether utilitarian, artistic or spiritual value. We can think about fertile land, healthful food, knowledge, productive labour, pure water and clean air, or physical infrastructure – that all add utilitarian value, each day.
By framing our business aims in terms of creating real living wealth, we can start finding (or re-finding) our true purpose in business.
Purpose is becoming a big issue. The recently launched GameChangers 500 (GC500) aims to provide the antidote to the Fortune 500, by creating a new list to profile the world’s top purpose-driven organisations that are maximising their positive impact, rather than just maximising their profit. It will be interesting to watch the impact of this listing, as the appreciation of purpose-driven business models gathers momentum.
And if we are able to open up our minds to the very real needs out there, coupled with the powerful possibilities of finding our purpose in helping to transform our world, the opportunities are endless.
Money and banks
In transforming to deliver on our true purpose in business, we still need further and deeper support. The most fundamental shift in expectations has to come from within our entire banking system.
The mainstream banks are vital in that they control the creation and allocation of money. As leading economist Martin Wolf reminds us, 97% of money supply in UK is written into existence by private banks – as a direct consequence of their issuing loans.
This model gives great power to the banks in making decisions on which investments will be supported and which will not. They are, therefore, the ultimate gatekeepers to influencing our ability to move towards a sustainable economic future.
We can think about workaround solutions, such as the creation of new independent money systems – based on alternative currencies – but these alone will not deliver the radical shift in investment and the pace that is required.
We can create a Green Investment Bank – as we have in the UK – but this can only deliver a limited impact. With its £3.8bn total fund, the UK Green Investment Bank only represents around 0.25% of UK GDP – a long way short of Stern’s 2%.
We can also look to the alternative and sustainable banks, such as those represented by the Global Alliance for Banking on Values – a group of the world’s leading sustainable banks with combined assets of over $70bn – but we need to mobilise reinvestment across the whole of our economies at a much greater scale – not just in the so-called green economy, but actually greening the whole economy.
We still have far too much of our financial capital tied up in ‘old economy’ activity and not enough being diverted into nurturing the sustainable economy. We still need the mainstream banks to step up to the plate.
It was good to hear the Governor of the Bank of England this week calling for banks to adopt higher ethical standards, but deeper reforms will be necessary. Two big shifts are required in the creation of money and how we allocate it.
Firstly, we need to we take away the power of private banks to write their own money into existence. Martin Wolf recently endorsed the Positive Money proposal, calling for money to be created by the state, in the public interest, and spent into the economy through government spending/allocation, instead of being lent into the economy by banks.
According to Wolf, this would also make it possible to increase the money supply without encouraging people to borrow to the hilt. It would end the ‘too-big-to-fail’ syndrome in banking, create more stable credit cycles and it would also transfer the benefits from creating money to the public.
Positive Money also calls for money to be created free of debt. This means that money could stimulate the real economy, create jobs, and make it possible for ordinary people to start reducing their own debts.
The second shift required is for mainstream banks to redefine their ‘purpose’ and associated lending criteria. We need different models for our banks – to enable investment in the right things.
Triodos Bank provides a great template; its very raison d’être is to help create a society that protects and promotes the quality of life for all and to enable individuals, organisations and businesses to use their money in ways that benefit people and the environment. All investments are focused on delivering these positive outcomes.
Wouldn’t it be nice if all of our banks invested in sustainable outcomes and helped their business and personal customers to do likewise; to make an affordable transition to a sustainable and low-carbon world?
If the mainstream banks were to remodel their purpose in this way, with suitably aligned investment criteria, then they could create and allocate money in support of the necessary transformation for our businesses and economies. Banking with purpose.
Conversely, if they choose to stick with their narrow perceptions of risk and opportunity, then it won’t happen – at least not to the required scale and pace of change we need.
For business, we need to challenge our banks – we need them to change. And if they don’t, we need to be prepared to carry out the threat of moving our money to more sustainable institutions.
The choice is stark: we can carry on as we are, on a pathway to economic and environmental collapse; or we can start to get more radical and start reinvesting in genuine transformation for a sustainable future.
To achieve this, we will need to mobilise investment and reinvestment like never before – connecting financial capital with a host of unmet needs – and to really support business transformation in universally affordable ways.
This will need a huge shift in investor behaviour, away from the narrow pursuits of maximising short-term financial gains to more holistic investment – models that will ultimately generate real living wealth for all.
This will also mean reforming our banking system – creating and allocating money in more sustainable ways. By changing the rules here, we really do change the whole game.
Money, like power, can be used for great good, but it can be also be used for great harm. There is a huge responsibility that goes with the stewardship of money and our financial capital is only as smart as the person holding it.
It’s time for all of us to get smarter in how we create, allocate and deploy our financial capital – from great to even greater expectations.
Michael Townsend is the founder & CEO of sustainable business solutions firm Earthshine.
© Faversham House Ltd 2022 edie news articles may be copied or forwarded for individual use only. No other reproduction or distribution is permitted without prior written consent.