Why Is Sustainability Popular?

Why Is Sustainability Popular?

Several forces have worked together to create an environment friendly to ESG investing.

Consumer demand

Conscious consumers are the result of decades of consumer education, media coverage, and collective awareness. Images help too: think of homeless orangutans (forest destruction for palm oil), credit card breaches (data protection), deaths due to food poisoning (industrial farming), and children working in sweatshops (labor standards). Some consumers are willing to pay higher prices or boycott companies as a result. Consumers put pressure on companies through their pocketbooks. Demand can occur swiftly and decisively, for example when activists and consumers pressure large companies to respond immediately to hot-button social issues.

Companies that embrace consumer demands for sustainable products and services can stand to gain many advantages. They can retain customer loyalty and enjoy a positive public profile. They can stay on the cutting edge of innovation. They can enjoy reduced and less expensive interference from regulators. And they can mold consumer preferences for years ahead. In turn, this is good news for investors.

Corporate demand

Corporations have increased their sustainability footprint following consumer demand and government regulations. The data has convinced many businesses that it can be profitable. Many issues that were not material (that is, of sufficient financial importance) decades ago are now seen as drivers of competitive advantages. With so many factors involved in sustainability models, companies have a lot to work with to stay ahead of the game. Investors watch all this closely.

The sustainability proposition can enhance a company in the marketplace in many ways:

• Customer retention. Consumers are loyal to companies that share their values.
• Employee attraction and retention. Employees go where their values are.
• Finding and leading markets. When a company has a sense of what its customers want, it can innovate and explore new markets. It can lead the markets for a long time.
• Influencing and molding consumer preferences. Companies that embrace sustainable values can develop new products and services with those ideals in mind.
• Increasing efficiency of assets and resources. Sustainability aims at reduction of waste. This can make a company more efficient.
• Cost reductions: Greater efficiency and waste reduction can lead to cost reductions.
• Fewer interventions from regulators. Complying with regulators can be disruptive, expensive, and time-consuming. Sustainability provides proactive practices for companies to adopt that can keep big government at bay.
• Managing investor impressions and relationships. Businesses can create an impression of being on top of market trends. They can be proactive and set the tone when seeking investment dollars.

Investor demand

Investors express their demand not only through their purchasing power but also through their positions as stockholders to influence changes in company practices. This is called active ownership. It can involve voting, introducing resolutions, and working with companies and legislators.

Individual investors vary in sophistication, wealth, and shareholder activism. Institutional investors consist of governments, endowments, insurance companies, pension funds, mutual funds, and more--this group exerts the most influence on the shape of the sustainability landscape due to its sheer size and buying power:

• Government. As an investor, government buys pension funds and pays for development projects. It also engages in public-private ventures, such as renewable energy, that leverage needed capital from the private sector.
• Endowments. Endowments are the investment portfolios of universities and other nonprofits. They tend to be very large, established bodies that exert a lot of influence. Examples of influence include divestment from fossil fuel companies and from governments whose policies are deemed objectionable, such as South Africa’s apartheid policy.
• Insurance companies. Insurance companies invest in the markets in order to support their ability to pay out insurance claims. They take a long-term view and want to ensure that the economy is able to produce good long-term returns.
• Pension and other retirement funds. These have a fiduciary duty to protect the financial interests of their members. This duty guides the selection of investments.

Sustainability aims to translate into improved cash flow through cost reductions, improved productivity, efficient operations, proactive interventions, and more. These financial ingredients support what investors seek: asset appreciation, income production, and risk avoidance.

Government demand

It is government’s job to keep its population secure and free from harm; thus, some socially responsible measures fall naturally under existing laws. Governments have unique influence due to their ability to make and enforce legal guidance. A well-known example of government action is its breakups of monopolies, such as AT&T in 1984, in order to remove what it calls unfair advantages. Regulations of working conditions, accounting rules, and the Glass-Steagall Act separating commercial and investment banking are other examples. The ability of government to introduce regulatory actions favorable to sustainable models helps make it easy for businesses and investors to get into this space and stay there.

Other government actions include these:

• Enacting disclosure requirements on sustainability information
• Passing budgets that direct money to sustainable opportunities
• Tax incentives for clean energy
• Creating enforcement task forces
• Providing investor education
• Regulations of new technologies
• Participating in international summits on sustainability issues
• Prohibiting greenwashing, false claims, omissions and deceptions
• Creating and enforcing ESG standards
• Investing pension money in sustainable funds