Ignoring sustainability in favour of short-termism will cause financial ruin, warns major investor
EXCLUSIVE: Companies that fail to realise the long-term benefits of sustainable investment will see their financial returns collapse, one of Britain's biggest investment groups has said.
Speaking to edie on the sidelines of the United Nations Environment Programme (UNEP) Emissions Gap report launch in London yesterday (4 November), Hermes Investment Management chief executive Saker Nusseibeh insisted that strong business performance on environmental issues now makes complete economic sense, delivering greater shareholder value at lower risk.
“We're gradually convincing businesses that not taking sustainability issues on-board effectively does not mitigate all of the risks,” Nusseibeh said. “In other words, it's a risk-reduction matrix that is becoming quite widespread. Insurance companies understand it, even energy companies understand it. We need to do more, but there is a growing acceptance right across the sector that taking on-board sustainability and environmental factors and governance factors mitigates risk.
”What we need to do now is go one step further - it's not just about mitigating risk, but about understanding the long-term economics of the business. We're not calculating both sides of the matrix. An investment in carbon which makes you money now, but leads to huge damages further down the line, is not a sustainable economic model. A business model which is based on unsustainable energy or carbon emissions is not a good model because it will not necessarily last for a long time.
“So it is bringing this longer-term aspect into the frame and convincing people that you have found both sides of the matrix. If you do that then you can have a model which is effective. Look at sustainability, environment, and governance. It's not just about risk mitigation, but about understanding the full economic picture and making the right choices for investment in the long-term.”
Hermes, which has $24bn of assets under management, is leading an effort to move away from the City’s short-term approach by encouraging others in the industry to focus on the environmental and economic impacts of investment decisions. The London-based firm is exploring the possibility of a new contract between investors and pension fund employers based on long-term sustainability rather than immediate economic return.
Nusseibeh insists that, as a stalwart of the world’s capital, the financial industry has the highest responsibility to ensure the low-carbon transition is a success. Fund managers are starting to buy shares in companies that are looking to adopt more sustainable business models, in particular those that adopt carbon pricing to record their environmental impact, the Anglo-Palestinian said. The Hermes chief hopes that investors’ shifting priorities will prompt a behaviour change among companies who can then begin to focus on the long-term benefits of sustainable energy.
“If we do not think about long-term investment in clean energy, then the outcome is such much worse and all of our financial returns collapse,” Nusseibeh added. “We need to push business to move faster in reducing carbon impact - take away the subsidies for high-carbon and reduce it in favour for low-carbon alternatives because that, in the long-term, is profitable. If we do that, we are getting the highest possible returns in the long-term.
“We need to measure the carbon footprint of companies worldwide because it is one of the greatest myths that the corporate world lives on an island in a virtual world that has no real impact. Every company has an impact on carbon. If we can measure that impact, we can deduct the negative impact. Companies will start to look long-term and realise that maybe it is not such a good investment.
“It is therefore our duty to make sure that it is done so in a way that is sustainable. We’re not doing that because 'we’re doomed' but because it’s a sensible long-term thing to do and because we are stalwarts of everyone’s money. The sooner the financial system works that out, the sooner we can do some real work that has a disruptive impact.”
Nusseibeh was one of several high-level panellists at yesterday's press conference for the UNEP 2016 Emissions Gap report which assessed the progress of efforts to reduce global CO2 levels. Coming a day before the Paris Agreement comes into force at the COP22 conference in Marrakech, the report revealed that the private sector must scale-up its climate ambition to help reduce an additional 25% from predicted 2030 greenhouse gas (GHG) emissions.
Speaking during the report’s launch, UN Environment executive director Eric Solheim called for more regulation to enable the private sector to outline a clear strategy for increasing emission reductions ambitions. Solheim echoed recent comments made by Unilever chief executive Paul Polman that the cost of not acting is higher than the cost of acting for business.
“There’s hardly any ceilings to what low-carbon business can achieve,” Solheim said. “We can be a lot more prosperous and have many more green jobs if we turn to the green sector. But we must empower business for this pattern. Far too often we speak about climate change as if it has cost. Climate change is not a cost. Most of what we need to o for climate change does not cost one single pound.
“What we need to do is regulate markets and be more creative and shift from brown capitalism into green inclusive capitalism. And most of all, the cost of stopping the hole in the ozone layer must benefit us all and create business opportunities. We must shift the language from thinking about this as a cost but as a huge business opportunity. Then we will succeed.”