Sunday Brunch: a financial perspective on sustainability
The financial implications of the sustainability transitions are becoming more important than ever. Over the last few years the pushback to sustainability has grown. We argue that the best counter is using the logic of long term value creation. Plus of course good old fashioned political lobbying.
It's become traditional at this time of year to do a round up, or maybe a look ahead. That's not for me. Instead I want to recap why I think taking a financial perspective on the sustainability transitions is becoming more important than ever. Arguably it's our best route to creating a more sustainable future.
The pushback to sustainability and climate has grown
It was not that long ago that it looked as if sustainability and ESG were going to win the day. Political progress, especially in Europe, was surprisingly rapid. And progress was broad based. And then it started to unravel. Some of it was political, changes in governments and 'new' presidents created new priorities. Some of it was economics, the 'cost of living crisis' in many countries shifted the political agenda from a focus on the long term to solving more immediate challenges. And some of it was defending the status quo 'let's not rock my business boat, I want to keep doing the same thing for a lot longer'.
How do we overcome these pushbacks?
The first of these pushbacks (politics) is outside by scope of expertise. I know how to factor political change into an investment case, but I don't know how to change how politicians think.
But, I do have answers to the other two (economics and resistance to change). My answer isn't to seek change because it's better for the wider society. Instead I appeal to the companies and investors self interest. What makes financial sense in the long run.
I want to be clear - this is not a total solution. We will still have governments and companies focusing on short term enrichment, even if it destroys the very things that sustain our long term success (or even survival). But what this approach does do is give shareholders levers that stand a decent chance of making a difference.
To do this we need to understand how companies create value. Not today or even next week, but what drives long term financial value creation.
Steven Bowen
This might not be driven by what many people first think. Maximising long term financial creation means preparing and investing for the long term. Which might result in short term financial pain, but investors understand this. It's not about profits today, it's about profits in five, ten and twenty years time.
Thinking about a possible sustainability investment case
Most investors know that expecting a company to do the same thing for the next twenty years or more is unlikely to deliver long term value creation. The external environment changes, and to remain profitable companies need to change as well.
Look at what happened to Nokia, Blockbuster Video and Kodak (to an extent). And then think about producers of fossil fuel powered cars, traditional movie studios, and Oil & Gas companies. As demand for their product changes (to be replaced by EV's, streaming services, and electrification respectively), these companies will either have to adapt, or become less profitable. And if they become less profitable, they become less valuable.
Which means that companies and investors must be constantly reviewing how the future might be different (change doesn't have to be certain, it just has to be possible/probable). And remembering that lobbyists and politicians can sometimes delay change. But very seldom stop it all together. So don't assume that a delaying action has a permanent impact, it might just shift the commercial advantage to others.
Jordyn Dahl
And then we can overlay this with questions such as do the companies have the skills and culture to change, if they do what investment/capex do they need to make (& when), and what financial returns (especially Return on Invested Capital or ROIC) can they reasonably be expected to generate?
Steven Bowen
Armed with this analysis companies and investors can make decisions about how quickly change is needed, and how best to improve the company's chances of success in this new world. And where companies are unwilling to act, investors can work to push and encourage ie engage.
And it's not just the obvious industries that need to do this. How we produce our food, construct our buildings, and generate our energy, will also change. Plus where our raw materials come from, so mining and mineral processing.
Steven Bowen
This is not the only tool in our armoury
I don't argue that working on financial self interest is the only approach. It will work best in a world where voters and politicians are well informed and educated, and where it's backed up by regulation and the rule of law.
So we still need to lobby and encourage. But we also need to mobilise the financial community, and that means communicating the investment case for change. Using the tools of strategy, competitive advantage, the drivers of customer demand, investment needs analysis, and financial returns/value creation.
At Christmas it might seem odd to argue for self interest over the wider community, but if it can work, who cares?
Some of you may have noticed that there was no Sunday Brunch last week. I was moving house (to Devon in the South West of England). This will probably be the last Sunday Brunch for 2025, so I hope 2026 treats you well (and hopefully better than 2025 did). See you in the new year.
One last thought
As an investor I don't really trust politicians. They change their minds and often favour short term wins over long term gains. I would rather not rely on them. Yes, regulation can make a real difference, but if the regulations keeps changing, how can we expect companies to invest.
Steven Bowen
Grant me the strength to accept the things I cannot change, the courage to change the things I can, and the wisdom to know the difference. Reinhold Niebuhr - a Lutheran theologian in the early 1930's
Please read: important legal stuff. Note - this is not investment advice.
