Let’s face it – although sustainable investing has gained global recognition and support over the past decade, for some people the ESG glass remains half-empty. That’s not because of politics – for the most part, investors around the world understand that environmental, social, and governance (ESG) issues matter because they can affect companies’ bottom line, resilience, and competitive positioning. Still, some wonder whether focusing on sustainability can make much of a difference in saving the planet from environmental disaster, improving work conditions, or making societies better overall.
Good news: there is a great deal of anecdotal evidence showing the benefits of embedding a sustainability focus in managing and investing. It’s not just that ignoring environmental, social, and governance issues can have a big negative impact, although that should not be overlooked. Focusing on positive outcomes resulting from a sustainability mindset shows the great potential for tremendous upside.
Sometimes the benefits of ESG may feel like nibbling around the edges. When a company adopts more worker-friendly policies and employee turnover declines, recruiting and training costs drop, but is it a “game-changer” for the company? Maybe not as much as inventing a new must-have product that takes the world by storm. Still, companies in mature, competitive industries know that the difference between operating at a profit versus a loss is about controlling costs while developing innovative products and going after more customers.
In this article we talk about sustainability-based initiatives that are having an impact now or will soon. Sometimes these small (or not-so-small) things are happening within big companies; sometimes they are generated by small businesses that will become attractive buyout targets, which is good for both founders and for investors.
Sustainability is a natural fit both for intrapreneurship at a big company and entrepreneurship at a start-up. Here’s the script: identify a need or problem, pull together a small group of people who are passionate about finding a solution, scrounge up some capital to get things started, develop a proof-of-concept, and turn it into something meaningfully profitable and sustainable.
Here are just a few examples that show that when it comes to efforts to improve sustainability, the glass is more than half-full:
UPS’s ORION system improves transportation efficiency
Transportation activities account for almost roughly 27 percent of US greenhouse gas (GHG) emissions. UPS, which delivers packages to 11.8 million customers in over 220 countries and territories each business day, is a big contributor to GHG emissions and fuel is an equally big cost for the company. For UPS and other companies in the sector, enhancing transportation efficiency is crucial to be sustainable over the long-term. UPS developed an AI-based system, ORION, which optimizes routes to minimize the number of turns their delivery drivers make. ORION now saves UPS 10 million gallons of fuel per year, generating financial benefits and decreasing UPS’s carbon footprint by 100,000 metric tonnes per year, the equivalent of removing over 20,000 cars from the roads.
Entrepreneurs Helping the Environment Today
So many companies are seeking to make it big while helping the environment; it is inspirational, encouraging, and even a bit overwhelming. Inc.’s recent article titled 7 Green Tech Startups With the Innovations–and the Funding–to Help Save the Planet talks about a startup growing kelp forests that can sequester gigatons of CO2 for centuries, a company making little electric cars for urban use that cost less than $20,000, and a company using a new approach to harnessing wave energy via cylindrical buoys that have an average capacity of 300 to 600 kilowatts, roughly the same as a big wind turbine (check out the article to find out about the other four ideas). They’re happening now, not the distant future.
But speaking of the future…
Some ideas are not quite ready to be put into use, but they’re close, and have the potential to make substantial contributions to sustainability. This article from UC Berkeley, the “Top 10 Green Technologies That Give Us Hope For A Sustainable Future” summarizes ideas that are both exciting in terms of their ability to help create a sustainable future and plausible in the near-term. These include green architecture and construction that will reduce energy use in lighting and lower the amount of heat loss, reducing or eliminating the need for heating, while sourcing construction materials from urban waste and landfills; a hybrid electricity- generator that uses waste water; more efficient alternatives to uranium to use in nuclear power plants; and turning biomass waste such as paper, grass, or wood chips into gas and eventually ethanol, using far less water with a smaller carbon footprint than traditional ethanol production.
Diversity, equity and inclusion – not just buzzwords
Sustainability isn’t only about improving the environment – it’s also about creating better societies with educated workers. One of the topics that has generated much attention in the ESG space recently is diversity, equity, and inclusion (DEI).
We’re going to be upfront here: there is a good deal of skepticism, and even hostility, about this topic. Absolutist thinking leads to failure no matter where it comes from, and some DEI disenchantment is driven by an overzealous push for DEI with no attached nuance. Still, many studies show that a diverse workforce really does contribute to profitability and makes companies stronger.
A recent article from Global Insights cites research that shows a diverse company has 2.3 times higher cash flow per employee than non-diverse companies, and that inclusive teams improve performance by up to 30 percent. The same article states that more diverse companies report 19 percent higher revenue than traditional ones, and that businesses in the top quartile for ethnic, racial, and gender diversity have a 25 percent greater likelihood of being more profitable.
The risk of ignoring ESG principles
As for the many downside risks of ignoring ESG considerations, we need only look to the $1.7 billion fine slapped on Wells Fargo Bank for, as CNN described it, “widespread mismanagement over multiple years that harmed over 16 million consumer accounts.” This “willful disregard” for corporate governance involved repeatedly misapplying loan payments, wrongfully foreclosing on homes, illegally repossessing vehicles, incorrectly assessing fees and interest, and charging surprise overdraft fees. That’s a painful hit for the bank’s shareholders who have to pay the fine plus $2+ billion more to compensate customers who were wronged. There’s a lot about corporate culture, bad incentives, and reputational damage in the Wells Fargo saga, and it’s all part of why ESG matters to management and to investors. For other examples, see our articles on why Data Security Crashes Without Good Governance, and Poor Governance – The Common Thread Of Corporate Blunders, and review our 25 Reasons Sustainable Investing Makes Economic Sense.
To find out how OWL ESG’s data can help you analyze investment opportunities or compare your firm to your peers in terms of sustainability issues that affect the bottom line, contact us.