One thing that is becoming clear amid the debate over how to respond to climate change is that prioritizing profit at the expense of the environment, or disregarding the social or sustainability consequences, is not just morally unacceptable, it is increasingly difficult. Big corporations are under pressure to take real action on emissions or risk the wrath of protesters, investors and even shareholders. As part of COP26, former governor of the Bank of England Mark Carney led the Glasgow Financial Alliance for Net Zero initiative as part of the United Nations’ Net-Zero Banking Alliance. Members now include 450 organizations that control a total of $130 trillion in assets. This accounts for around 40 percent of global assets.
These companies have agreed to reduce their greenhouse gas and climate change contributions to net zero by 2050 by combining action with accountability, with signatory banks setting an intermediate target for 2030 or sooner, using robust, science-based guidelines.
A new kind of company
A spectrum of “purpose and impact-driven” enterprises now exists. This means that organizations are actively trying to solve social and environmental problems as part of their main business activities. These range from social enterprises helping with environmental and social causes locally and nationally to certified B corporations, such as Allbirds, Chloé, Patagonia, Athleta, etc., which are legally required to consider the impact of their decisions on their workers, customers, suppliers, community, and the environment. In short: businesses now have a range of ways to ensure that their activities provide a social or environmental benefit.
Trying to solve social and environmental problems sets a new purpose for organizations, and even the largest corporations are buying into the purpose and impact trend. Companies publicly listed on stock exchanges want to attract investment, and give investors confidence that their business will provide a better than average return on that investment, prompting the widespread adoption of Environmental, Social and Governance (“ESG”) initiatives by companies, and corresponding public-facing campaigns.
Purpose and impact in investing terms can be captured by ESG investments, which report and track these factors in addition to pure financial performance. Investors are proving to be increasingly bullish on ESG investments, and for good reason: on the S&P500 index, which tracks the performance of the 500 largest companies on U.S. stock exchanges, 16 of 27 ESG investments outperformed the market in 2021. In Europe, a sample of 745 ESG funds shows that the majority have done better than non-ESG funds on a three, five, and ten-year basis.
Making big corporations accountable
The strong performance of ESG investment is turning both corporate and investor heads. The notion that fossil fuel is a sure-fire investment has also been questioned, as future returns are expected to diminish. Earlier this year, leading petrochemical corporations ExxonMobil and Chevron, for example, suffered shareholder revolts over their failure to demonstrate strategies to curb emissions, while Shell suffered defeat in the Dutch courts in a citizen-led case, and was ordered to expand its plans to cut its levels of emissions. The ability of major corporations and investors to ignore social and environmental risks is evidently on its way out. Meanwhile, the benefits of investing in socially and environmentally responsible businesses are becoming clearer and more attractive.
The 2017 Task Force on Climate-Related Financial Disclosures is moving towards greater scrutiny of scope 3 emissions of greenhouse gases. i.e., the indirect emissions that are incurred by a company’s activities such as transport, employee commuting, waste disposal and so on, which are created as part of the business’s broader value chain. This initiative will likely be boosted further by the Science Based Targets Initiative, which launched the world’s first net zero standard at the end of October 2021, and is expected to help organizations across the board to measure greenhouse gas and climate change contributions across all of their activities.
What this means is that customers, themselves, will also have to be net zero if entities, such as banks, are to achieve their own commitments. So, if a small company is looking for a business loan, its lending bank will expect it to also have net zero commitments on greenhouse gases and climate change. Financial firms signed up to Glasgow Financial Alliance for Net Zero also have huge investments in stocks and shares. Large companies listed on stock exchanges that are looking for investment will need to convince banks that they, too, will be moving towards net zero on greenhouse gas emissions and climate change. Businesses that cannot demonstrate clear commitments to net zero – no matter the industry – will have far fewer lenders and investors to choose from.
Eight years after the G8 Social Impact Investment Taskforce was established, business are finally aligning themselves to social and environmental goals. Companies that pay careful attention to their social and environmental impact will have more opportunities to secure investment. At the same time, socially and environmentally responsible companies that have put sustainability at the center of their business are already finding success in the market. And the way financial markets are moving seems to indicate that investment in sustainability will only continue to pay off.
Craig Anderson is a Lecturer in Strategic Sustainable Business at the University of Stirling. (This article was initially published by The Conversation.)