Reducing Risk and Improving Performance: Mainstream Sustainability Comes Into its Own

By Marta Maretich @maximpactdotcom

It’s official: sustainability is mainstream. 2015 is tipped to be the “year of sustainability” according to UN chief Ban Ki-moon.  Following the publication of the UN report setting forth development goals to 2030, including substantial sustainability goals that link global prosperity with the protection of natural resources, the spotlight is on sustainability as a means to address a range of planetary ills and change the very nature of business.

What’s driving this move? Deepening concerns about vanishing natural resources, climate change and pollution are heightening awareness of sustainability issues on a popular level. This in turn is having an impact on the world of business, which is making sustainability more of a focus.  Many of the major themes dominating this week’s WEF conference in Davos—climate change, oil, development, wealth and social inequality —  touch on issues of sustainability. For Ban Ki-moon, the private sector will play a key role in sustainability, alongside governments, in creating a future that includes more jobs, increased gender equality and better health for world populations.

All this is validation for the green business sector and impact investors who have long embraced the sustainability agenda. Even more heartening —  and more indicative that the movement will endure and expand its influence — is a growing recognition that sustainable practices bring business advantages in two areas: attractiveness to investors and improved performance. While the principles behind sustainability have wide appeal, hard-nosed decision-makers in financial institutions will only factor sustainability in if it brings material benefits. Fortunately, a growing body of evidence reveals that it does, especially when it comes to mitigating risk.

More sustainability = less risk

For most mainstream investors sustainability is all about risk management.  A growing body of evidence shows that companies that ignore sustainability issues, or, worse, engage in unsustainable practices, present increased risks for investors in many areas. As a result, investors who formerly took no interest in non-financial performance are starting to pay attention. They now look carefully at sustainability, along with other factors including governance and social impact, because of the risks associated with these areas.  In a global trend, investors now expect company reports to disclose detailed information on non-financial information including ESG measures and impact. If it is missing, or unconvincing, they won’t commit.

In a knock-on effect, investor demand for more transparency and accountability on non-financial performance measures is driving a global trend toward increased disclosure and integrated reporting. SASB has established standard measures that allow companies to attribute “materiality” directly to sustainability issues. Meanwhile, the demand for third-party verification of sustainability performance information is fuelling the continuing expansion of a data validation industry.

The pressure to disclose places obvious burdens on the companies that have to establish sustainability systems, then track, validate and report sustainability information. However, the rewards of sustainability are becoming more apparent and may offset the added cost.

Boosting performance with sustainability

A growing body of research indicates that companies that voluntarily adopt social and environmental sustainability policies can outperform companies that don’t. A Deutsche Bank review academic literature, for example, concluded that firms with higher ratings for ESG exhibit both market-based and accounting-based outperformance. New Eurosif research shows sustainable investments outperforming the mainstream in European markets. In  3-year study by PWC, higher impact portfolios outperformed a traditional portfolio model on both return (higher by 1.6% per year) and risk (lower by 1.7% per year).

Improved performance must be the ultimate inducement to mainstream investors — and of course it’s yet another piece of evidence that the early advocates of sustainability were right all along. But this news is good for the sector in other ways.

For socially-minded investors who already use sustainability as a measure of investability, the normalization of sustainability will bring good things. The fact that businesses of all kinds are embracing sustainability will mean that impact and sustainable investors will be able to choose from a wider pool of suitable investments. The presence of mainstream investors will expand the reach of sustainability, offer opportunities for partnership and collaboration and bring the principles of sustainability to bear on a wide variety of global issues.

Nonetheless, the social and impact investing sector will go on playing a key role in maintaining standards, innovating techniques and leading the field in making sustainability a core value for global business. As Ban Ki-moon writes, “There is no country or society where sustainability is not important or necessary. We all share the responsibility to work for a sustainable future and we will all reap the benefits.”

Image credit: Hope of Deliverance by Matias Brum