Investors Rejecting Unsustainable Assets

For money managers, ignoring climate change isn’t worth the cost

This April, the Bank of England issued a worrying statement: if climate change goes unchecked, financial markets could face losses of up to £15.3tr. This, paired with the UK government’s recent announcement of a ‘climate crisis’, shows that it’s not just environmentalists who are concerned about the state of the planet.

Asset managers have become a major player in the push for sustainable business, in some cases withdrawing their investments from companies that fail to meet the mark. With trillions of pounds at stake, it doesn’t take a finance expert to see why. So, what do businesses need to do to keep their investors on board?

A new corporate climate

Environmental, social, and governance (ESG) factors have become key considerations for individual investors and investment firms. ESG investing represents a mass movement away from sin stocks like gambling and tobacco towards assets that have fewer negative side effects. On the one hand, this is due to a more conscientious society. On the other, it is because unsustainable assets just don’t generate as much money as cleaner alternatives.

In a demonstration of ESG investment values, the Bank of England has published a list of supervisory guidelines for the banks and insurance firms that it oversees. It is the first regulator to do so, making it clear to financial organisations that practical action must be taken in response to climate change. The Bank has also formed the Climate Financial Risk Forum (CFRF) to act as a guide through financial uncertainty.

Legal & General, the UK’s largest money manager, has embarked on a somewhat more drastic campaign of shareholder disengagement. Instead of nudging businesses with guidance frameworks, the investment giant will no longer work with companies who fail to meet their expectations. So far, Legal & General has blacklisted eight businesses. Condemnable offences include a lack of diversity in senior teams, unfair pay, and poor quality financial information, but ignoring climate concerns sits at the very top.

What this means, in theory, is that companies who want to be seen as a good investment will stop paying lip service to climate change and begin to take a more active approach. The motivation may be monetary, but the result remains the same – sustainability has shot to the top of the agenda.

Investing in the future

At the heart of asset managers’ initiatives to chivvy companies to change is the indisputable fact that businesses that adapt are more successful than those that do not. The environmental threat levied by climate change and emissions is perhaps the biggest shift that businesses (not to mention everyone else) will have to overcome.

So, where should they begin? We know that companies are becoming increasingly consumer centric, and that customer research can inform strategy to some extent. There are some things, though, that companies have to work out for themselves. These questions span the entire supply chain, from initial design to beyond the point of sale. Are materials sustainably sourced? Which operational methods could be altered to reduce wastage? What different packaging solutions could be used? How are products and services delivered to the end user? How are these products and services then used, and what is their impact after purchase? It’s not just conscientious customers who care about the answers to these questions.

In the eyes of investors, the most sustainable businesses are also those most worthy of funding. This isn’t because they are doing the right thing, but because they are doing the most logical thing. If a resource is finite, and constitutes a significant proportion of a process or product, then that process or product immediately becomes a risk. Thanks to the internal efforts of asset managers, businesses are realising this relatively new reality.

From individual venture capitalists to huge investment firms, investors have realised that sustainability is synonymous with longevity. Pouring capital into a company that doesn’t operate with climate change and environmental preservation in mind is a risk simply not worth taking. Assets that don’t consider these concerns are no longer viable investments. If consumer and government pressure don’t catalyse universal change, then ESG investing certainly will.

 

 

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