Why The Sustainable Investor?
Building a better understanding of why and how sustainability can impact finance, investment, and strategy
Sustainability can be a long term value creator for investors
There are broadly two aspects to making our economy more sustainable. The first (and perhaps the most important) is getting 'civil society' to recognise the problem and then act. Actions could be via regulation, but they could also be through consumer buying preferences (not buying products made with slave labour) and decision making by workers (preferring to work for sustainable companies).
These actions, plus the impacts of technology, and the effects of external environmental and social changes, create the impetus for companies to act.
Companies will act if there is a long term financial benefit.
From the perspective of investors, if we want companies to become more sustainable we need to do at least two things. First, we need to link the impact of the upcoming sustainability transitions directly to the company's sources of competitive advantage and their strategy.
Second, we need to highlight the long term financial risks and opportunities. What are the financial consequences of action (or inaction)?
From the perspective of a company it's similar. They need to ensure that their strategy is aligned with the changes that the sustainability transitions will likely bring. They need to set out how the actions they have chosen will impact their long term financials and value creation. And they need to explain this (disclosure) to their investors in a clear way, with meaningful intermediate actions and outcomes. Put simply, they need to take their investors with them as they transition.
Companies and investors will not become more sustainable just because it's the right thing to do. They need to see a financial benefit.
But that benefit doesn't have to be immediate. This is not about a short term boost to profits. In fact it's better if the changes make the company more sustainable in the long run - this is just a question of long term valuation mathematics. A long term gain is worth way more to the company and it's investors than a short term bump that is then lost.
The opportunities can be from moving into market segments that offer more attractive long term financial returns. Or they could come from better risk management, minimising the hit from possible future negative impacts - regulation, the impact of environmental and social changes, and the emergence of new technologies and business models.
Sometimes these opportunities and risks emerge quickly, but in many cases they will develop over years, or even decades. And so they can be easy to ignore. But even for those risks that emerge slowly, it can make sense to start adapting now, not waiting.
Linking sustainability to investing
How can we make the sustainability related changes actually happen. First, we need to recognise that in many ways the upcoming sustainability changes are no different from other opportunities and risks companies face.
Companies should not treat sustainability as a box ticking exercise. It should be an essential element of their competitive analysis and strategy selection. And they should carefully explain their approach to their shareholders and regularly disclose progress. Sustainability actions can create long term financial value.
And second, while business as usual is often the worst response, change at a company level can be challenging. Which is where investors come in - engaging with management and the board to ensure that sustainability is treated as a key strategy and financial issue. And that the company actually has a meaningful and deliverable plan, that they deliver against.
Sustainability Strategy Investing Finance.
Team with decades of experience
Steven Bowen
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