The green recovery: investors care about ESG
The planet is heating up – and so are investors’ interests in businesses that prove their commitment to Economic, Social and Governance (ESG) concerns. Consumers care more about the environment and corporate sustainability than ever before. And governments are more awake to scrutinsing the impact of climate change too. As a result, the winds of change have hit investment funds, venture capitalists and angels alike.
Ideals have, quite simply, evolved, and business owners need to make sure they’re keeping up – regardless of size. We’ve written about why retailers should care about sustainability here, but really it’s something that every business can and should tackle. If you’re considering funding through equity or selling up down the line, it’s important you make yourself appealing to investors.
We’ve taken a look at the current impact of ESG on the investment landscape and what companies are doing about it. Read on for some information and advice on how you can embrace ESG and make sustainability part of your recovery.
Countries and companies alike are setting carbon neutrality targets (which you might see referred to as net zero-carbon goals). Currently over 20% of the world’s biggest companies have made some kind of target to reach net zero emissions. AstraZeneca, Rolls-Royce and BT, amongst others, have pledged to achieve net zero by 2050.
The inevitability of climate change has had a clear impact on businesses and governments, and investors have followed. FactSet found that over a quarter of S&P 500 companies had cited ESG on their Q4 earnings calls in 2020. Investment analytics company Morningstar has reported that a record $350 billion was poured into ESG investment funds last year. At some points it was over $2 billion a day.
It’s not just the environment and emissions that business leaders are thinking about. Diversity and management practices are critically important now too. Johnson & Johnson, for example, has organised a racial equity audit along with human rights due diligence and diversity and inclusion reports at other major institutions, according to Bloomberg analysts.
Tackling ESG concerns isn’t only helpful for attracting private investment. For business owners that are dreaming big, the possibility of one day going public could influence your current policies. Recent IPOs didn’t perform as well as expected when social impact (particularly workers’ conditions) was negatively viewed by the public. Every business is accountable for its policies, and just because you start small doesn’t mean you won’t grow and be under the same level of increasing scrutiny. Now is the time to evaluate your company priorities and processes.
Companies in every sector are hiring for sustainability experts. Five years ago it was unlikely that anyone would have heard of a Head of Sustainability, but now companies like Gymshark and Depop have created that role. Consulting firms and private equity funds are even hiring Chief Sustainability Officers and Heads of ESG to help them advise clients and analyse potential acquisitions. With all this extra money spent on hiring experts, it’s hard to think that ESG investing will slow down anytime soon.
So what does a Head of Sustainability really do? Essentially, they’re there to work on a sustainability strategy. This is now an important part of a company’s legacy. Taking an evidence-based approach and defining sustainability metrics is something every business can think about exploring. That could look like setting clear targets (and putting processes in place to stick to them). For ESG issues that might include:
- Pledging to achieve carbon neutrality by a specific year
- Switching to 100% renewable energy
- Publishing pay gap data publically
- Auditing your supply chain to look for any human rights infringements You can even explore carbon neutrality certification to give your policies some official recognition.
Don’t view a commitment to sustainability as a simple act of charity. There’s often a long term financial benefit for businesses themselves. If you invest in better made, sustainable machinery or products, you’re able to extend their life cycles. And ultimately it’s a way to appeal to customers’ loyalty.
Hiring into sustainability roles also suggests that investors, financial advisors and business leaders see ESG as something that’s likely to become regulated. The value of a business model now runs deeper than something financial metrics can model. It certainly feels like we’re in the build-up to legal mandates that require ESG information to be reported.
This regulation is likely to look at climate risk and diversity specifically. This month the Bank of England published its new stress test to measure the financial impact of climate changes on lenders and insurers. These include flooding, wildfires and rising sea levels amongst other factors. Climate change is being scrutinised by the world’s leading financial institutions like never before. It won’t be long until this is commonplace.
With ESG investment only rising, and sustainability expertise in hot demand, now’s the time to think about where your business falls on the spectrum. Acting before regulation comes into effect and before you need to seek investment is a good idea.
Understanding your customer base and anticipating new priorities is an important factor in future-proofing your business, and your profitability. If you’re going to address them, ESG concerns should be reflected in your business by design, not just used as a tickbox for marketing purposes. Ideally they’ll be part of your product or service, represented in your business model, and followed through in your operations.
If you decide to invest in new equipment or hire more people to tackle these issues, we can help you boost your cash reserves to make it happen. Just head to marketfinance.com to find out more.