Sunday Brunch: it's companies that will really deliver change (Part 1)

Sunday Brunch: it's companies that will really deliver change (Part 1)

We should not forget that it's companies who will, by and large, deliver the changes. It's companies that will make investments, change products and services, and adopt new operational practices.

"COP28: the UN climate summit ends with divisive deal as countries agreed on a text that encourages countries to move away from fossil fuels and quickly ramp up renewable energy". The Guardian newspaper live coverage December 2023

How we as investors can best encourage companies to change

2024 looks like its going to be another busy year in the world of sustainability, with new reporting regulations, supply chain laws, and yet another COP. While these events are all important, we should not forget that it's companies who will, by and large, deliver the changes. It's companies that will make investments, change products and services, and adopt new operational practices.

And so, in many ways, the ultimate measure of success of any policy, conference or regulation will be 'how has it changed the behavior of companies'? And the same applies to our engagement with companies - do we stand a realistic chance of encouraging change, or are we trying to 'push water uphill with a rake'?

Companies will change either because they have to (safety standards, pollution limitations etc) or because it makes financial sense for them to do so. My observation is that many companies somewhat reluctantly adapt regulations - in some cases doing the bare minimum. By contrast, they often show a lot more enthusiasm for profit enhancing measures.

Most sustainability professionals understand the first category - regulation. We are pretty good at setting rules and targets. The cynic in me observes that we are less proficient at enforcement, especially if it costs money. But that is a debate for another day.

By contrast the notion of 'making financial sense' is less well understood. Which is not good, as the concept of creating long term financial value needs to sit at the heart of how we persuade companies to act.

The true financial value of a company is not created today, or even this year. It's not about the short term. Real financial value comes from actions that produce benefits five, ten or even twenty years into the future. Most truly successful companies prepare for the future, rather than just live in the present.

This is where the sustainability transitions come into play. By preparing for future change, companies can add financial value as well as be good global citizens.

But, we need to differentiate between what adds financial value in the long term, and what is outside the scope of what companies can change. This requires us to understand what levers companies have to pull to create value, and drive change. And hence how we can influence their direction of travel.

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It's companies that will really deliver change

Welcome back. I hope you had a good break and are refreshed to attack 2024. I for one (for personal reasons) was glad to see the back of 2023 (and 2022 as well).

I want to start the 2024 Sunday Brunches by standing back a bit and looking at what we, as investors, can actually deliver. If sustainable investing really does make a difference, then where does it work, and where is it ineffective? And where it works, what we can do to make it even more effective?

Before I start, this blog was previously published as a The Sustainable Investor newsletter on LinkedIn. If you have already read it there, you might want to wait until we publish part 2 - a practical case study focused on supply chains.

This is a longer than normal blog, but I hope you will stick with me, as it sets the background for future discussions. It will also serve as a springboard for future blogs which will look at this issue in some more detail.

One comment I frequently get is that a lot of discussion around sustainable investment is based around rules - such as what is an article 9 fund ? This debate might be useful in terms of identifying those funds that are aligned with your values.

SFDR: Market Divided on Future of Article 8, 9 Funds
Market participants flag importance of double materiality to enhance Article 8/9 definition alignment, stress need to recognise transition strategies.

But it's less helpful if you actually want your capital to make a difference on the ground, as well as deliver a fair financial return. And it gives only limited guidance as to how you might engage with companies to get them to change.

The plan is to tackle this head on over the coming months, looking at what has worked in traditional activism, and how we can adapt this to sustainable investing. We broadly agree with Alex Edman's premise, set out in his click bait titled article "The end of ESG". Sustainable investing is not something special - not because it's not important, but because some sustainability factors are value creation factors.

If we are to persuade companies to change we need to focus on this value creation aspect. And equally, recognise when companies are not the people best placed to make change to happen.

First up - why is this discussion important? Put simply, after an extended period when mainstream ESG investing over promised and largely under delivered, we are at the beginning of major rethink. By this I don't mean a rise in ESG bashing. This is often politically motivated and, in my experience, often not based on any sort of detailed analysis.

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