It is not that long ago – November 2021 – when world leaders were jostling to be pictured with celebrities like Leonardo DiCaprio, Stella McCartney or Emma Watson at the much-vaunted COP26 climate conference in Glasgow. Joe Biden (US), Fumio Kishida (Japan), Scott Morrison (Australia) and Narendra Modi (India) were among 120 heads of state and government who flew in to be hosted by Boris Johnson and help set the global sustainability agenda for this decade and beyond. Back then, it was hip to be green and being an attendee at the events in Glasgow was the political equivalent of the fashion week front row. ‘Cash, coal, cars and trees - to keep the world to 1.5 degrees’ – was the catchy phrase coined by a spokesperson for Johnson ahead of the conference, summarising the host’s strategy of attacking the climate crisis on several fronts.
Little more than two years on, the ‘sustainability’ mood music has changed with politicians and campaigners finding themselves caught in the crosshairs of a mounting public backlash to green policies. Messaging from the electorate is, however, extremely contradictory. For example, in the UK, polling consistently shows that action on climate change is near the top of voters' concerns - behind the cost of living and the health service – but this is not matched by an appetite to pay for this action. It seems many around the globe are horrified by what is happening to the planet, but not eager to share the cost of addressing the problem.
As this chart illustrates, this is not just an issue in the UK. Polling in developed countries shows citizens strongly view climate change as a real risk needing government action. Yet, when it comes to paying for such policies and faced with the prospect of higher taxes for decarbonisation, broad majorities oppose this. Polling also shows that green parties in Europe - especially in Germany and in the EU Parliament - are losing considerable ground, a good proxy for voter discontent with environmental policymaking.
What signals can we glean from the corporate sector?
Ifwe use observations from a study recently published in the Harvard Business Review (HBR) as an indicator for how the private sector is tackling the broader topic of sustainability, similar contradictory insights reveal themselves. Based on a survey of leading Chief Sustainability Officers (CSOs) there is a recognition their primary role has started to shift. Previously, their task was to tell an appealing story about corporate sustainability initiatives to the company’s many stakeholders, and their implicit goal was to deflect reputational risk. In the companies most serious about integrating material environmental, social, and governance (ESG) issues into strategy and capital allocation, the CSO now has a much more strategic role, closely integrated with other functions, such as finance, operations, product development and technology. This said, closing the gap between a suite of well-intentioned (and highly publicised) sustainability commitments, and the operational realities, is the challenge. In other words, the ability to demonstrate value creation while pursuing this strategy is under increasing scrutiny.
Returning to the HBR-published data, 93% of respondents felt that sustainability was ‘very important’ or ‘fairly important’ to commercial success. From there – in the words of the researchers - it unravels, showing a serious lack of real commitment which demonstrates the sorry state of sustainability for many, if not most, companies today. Only half of senior management teams are focused on sustainability risks, opportunities and impacts, and just 37% saw sustainability as very integrated into the core of their business.
The areas where sustainability is perceived as having the highest value are the usual ‘intangibles’ - enhancing brand and reputation, strengthening stakeholder and community relations, employee attraction and retention, and facilitating partnerships and collaborations. It is one thing to have a mantra that sustainability is key to value creation; it is quite another to show it.
Perhaps even worse are the low levels of belief of what kinds of sustainability actions can unlock more value. About one-third cite engagement with customers and employees and defining clear goals and targets for sustainability.
What about investors?
Rising interest rates, disrupted supply chains and inflationary pressures created a perfect storm for many sectors of the sustainable investment space in recent years. These headwinds have been particularly challenging for the clean energy sector, where investors endured a brutal 2023, illustrated by the 40% peak-to-trough decline in the iShares Global Clean Energy Index during the year.
Investors appear to have been voting with their feet, with Morningstar reporting the first quarter of outflows from global sustainable funds in the last three months of 2023, driven by an acceleration of investors exiting ESG funds in the US and Japan, with allocators pulling $5bn from US sustainable funds in Q4. A total of $13bn exited US sustainable funds in 2023, as anti-ESG rhetoric – which is at its most vocal ‘across the pond’ - gained further momentum.
But wait, things are not as bleak as headlines may have you believe
Staying with investors, the very same Morningstar report also highlighted ESG funds in Europe – by far the largest market – continued to hold up better than the rest of the fund universe last year. Global ESG fund assets kept rising too. Moreover, a leading ETF provider has reported their MSCI World ESG fund is one of their top 5 vehicles in terms of inflows in the early stages of 2024.
It is also important to recognise the sustainable investment universe is much broader than the clean energy space. Additionally, there are a suite of fund houses, notably in Europe, who have been managing assets aligned to environmental and social mandates for many years. By way of example, the Swiss-based team at Vontobel have been running their Global Environmental Change fund since 2008, allocating capital across 6 sustainability pillars: Resource Efficient Industry; Clean Water; Clean Energy Infrastructure; Low Emission Transportation; Building Technology; and Life Cycle Management. This fund is benchmarked to the MSCI World Index (in other words, developed market equities, dominated by the US) which it has outperformed since that inception date. A clear demonstration that investing with positive impact can deliver attractive returns too.
Returning to the corporate sector, most companies plan to spend more on ESG within the next three years, according to a report recently published by KPMG. Driven by reporting and shareholder demands, 90% of the 550 companies responding to the survey said they will invest more in environmental, social, and governance capabilities in the next three years. The companies were based in the US, Europe, Canada, Mexico, Asia Pacific and South America, and represented multiple industries including energy, tech, healthcare and financial services. The main increases in ESG spend will be through adding dedicated ESG personnel, software, and more employee training and education. The disconnect between strategy and execution remains – only 33% of the companies have plans in place to align sustainability goals with business strategy - but the direction of travel is more encouraging.
This brings us back to politics and public policy. With almost half the population of the world heading to the polls this year, we have no doubt sustainability will be front of mind for politicians and voters alike. Expert choreography will shape the debate, and who will be dancing to what tune, only time will tell.
Russell Waite and Jon Proudfoot
Sources Kuenssberg: Are the politics of climate change going out of fashion? Alpine Macro: Renewables Rebellion HBR: The Evolving Role of the Chief Sustainability Officer KPMG: Addressing the Strategy Execution Gap in Sustainability Reporting
