Harvard’s Business Review’s Top 10 2017 Sustainability Tales, ESG ETFs in 2017, Big Food and its water problem, World Bank says no to oil and gas, free online course on sustainability offered by The University of Leicester, and more conscious capitalism in the news…
The definition of sustainability and conscious capitalism in business expanded in 2017 to address how companies navigate environmental and social challenges, from carbon footprint to taking a stand on human rights. Here are the top 10 developments that business leaders should keep on their radar.
1. US leaders from the public and private sectors rejected Trump’s decision on the Paris accord and pushed back.
- 25 multinationals, (Apple, Facebook, Google, HPE, Ingersoll Rand, Intel, Microsoft, PG&E, Tiffany, and Unilever…), ran a full-page ad in the Wall Street Journal asking Trump to stay committed to the agreement.
- Dozens of big companies, states, cities, and universities declared, We Are Still In.
- California, Washington, New York, and others, a third of the U.S. population and GDP, announced the formation of the U.S. Climate Alliance.
- California Governor Jerry Brown emerged as the de facto climate leader for the United States, holding his own meetings in China and headlining a delegation to the global climate talks in Bonn.
- 385 local leaders have joined the U.S. Climate Mayors pact.
- A group of high -profile business leaders offered their thoughts on the sustainability agenda at Harvard Business Review.
2. The deadly costs of climate change became even more obvious.
- Science got clearer about the connection between extreme weather and human-caused climate change.
- Flooding in South Asia killed more than 1,200 people.
- Asia experienced shocking heat, including a day in Pakistan that hit nearly 130 degrees Fahrenheit.
- Hurricane Harvey hit Houston hard (the before-and-after flooding pictures are mind-boggling), and the national weather service added colors to flood maps to reflect the record 30 inches of rain that fell.
- Hurricane Irma demolished Caribbean islands, and Hurricane Maria created an economic and humanitarian disaster in Puerto Rico. A third of the island is still without power, and 10% of these U.S. citizens have no water.
- Unprecedented wildfires ripped through Napa and central California, as well as Los Angeles County.
3. The Trump administration started dismantling environmental protections.
The EPA head, Scott Pruitt, spent years suing the agency and essentially intends on dismantling it. Pruitt and Trump, with assists from Interior Secretary Ryan Zinke and Energy Secretary Rick Perry, are trying to:
- Eliminate the Clean Power Plan (one of President Obama’s main efforts to rein in power plant carbon pollution).
- Reduce restrictions on some dangerous chemicals and pesticides.
- Get rid of rules that limit natural gas leaks.
- Slash the size of national monuments in what The New York Times called “the largest rollback of federal land protection in the nation’s history.” (Patagonia, took an aggressive public stand against this.)
- Prop up coal and nuclear power against all economics and market forces.
4. Investors woke up about climate risk and the benefits of sustainability.
- BlackRock said its “engagement priorities” for talking to CEOs would include climate risk and boardroom diversity.
- Shareholder resolutions on climate disclosure and strategies succeeded for the first time at Occidental Petroleum and ExxonMobil.
- Vanguard, which led the charge at Exxon, also declared climate risk and gender diversity “defining themes” of its investment strategy.
- Institutional investors continued to drive climate action, with hundreds signing a statement of support for the Paris agreement.
- Norway’s $1 trillion Wealth Fund is forcing banks to disclose the carbon footprint of loans and will divest from fossil fuels.
- The World Bank will stop financing upstream oil and gas projects after 2019.
- The Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (TCFD) issued a critical set of guidelines for investors and insurers to understand climate risks.
- A group of 225 global investors with $26 trillion under management launched “Climate Action 100+” to “engage” with large emitters on their management and disclosure of climate risks. Moody’s told cities to address climate risks or face downgrades on their bonds.
5. China accelerated its cleantech advantage.
- China announced it would spend $360 billion on renewable energy by 2020.
- China canceled 103 coal plants, committed to cut coal by 30%.
- China made big moves in electric vehicles. (see #9, below)
- China erected the world’s largest land-based and floating solar farms (becoming the world’s largest solar producer in the process), and built a solar farm in the shape of a giant panda.
6. Cleantech continued its relentless march and coal continued to die.
As a whole, the economics of every major green technology got radically better.
- Morgan Stanley predicted an “inflection point” in 2020 when renewables become the cheapest energy source globally.
- France, India, Britain, Norway, and China, committed to banning diesel and gas vehicles.
- GM and Ford announced major investments in EVs.
- Volvo plans to phase out conventional engines starting as soon as 2019.
- A group of multinationals with big logistics operations launched EV100, an initiative to speed up the switch to EVs.
- Shenzhen, China, moved its entire bus fleet to EV.
- EV sales were up 63% globally.
- Batteries became 50% cheaper since 2014.
- Tesla built grid-scale storage for Southern California and quickly erected the world’s largest lithium-ion battery storage in Australia.
- Michigan committed to going coal-free.
- The EU announced no new coal plants after 2020.
- Coal is shown the door.
7. Famous CEOs took moral stands.
- Tesla’s Elon Musk and Disney’s Robert Iger left the president’s CEO advisory councils in the spring after the Paris climate decision.
- When the president said there were “some very fine people” among the white supremacists, the CEO Advisory Councils disbanded quickly, with the leaders of Pepsi, IBM, GM, BCG, Merck, 3M, and others walking away.
- While Apple’s Tim Cook made a blended argument for sustainability that isn’t about philanthropy and polar bears, but rather the core business and its role in society, we found out that Apple has stashed a quarter of a trillion dollars in cash outside the US to avoid taxes.
8. Companies went to court.
- Tech companies big and small filed an “amicus brief” to fight the president’s first executive order on immigration.
- Biotech firms spoke out .
- Fifty big companies asked a New York federal appeals court to fight discrimination based on sexual orientation.
- Companies lobbied for pro-environmental and social policies.
- Procter & Gamble, Walmart, Unilever, General Mills, Target, General Motors, and Nestle pushed the state of Missouri to pass a bill to make it easier for them to buy renewable energy.
9. The Super Bowl
- Budweiser’s ad told the story of their founder and proudly pointed out his immigrant status.
- 84 Lumber went viral with a five-minute video about the journey of a family from central America.
- Coca-Cola focused on diversity and inclusion with its multi-lingual ad.
- Though Audi’s ad “Daughter” lamented the lack of pay equity for women, Audi then took heat for its own record on pay and women in leadership.
10. Unilever fights off a hostile takeover bid.
Unilever is the consensus corporate leader on managing sustainability for business and societal value. An attempted takeover of Unilever by Kraft Heinz and 3G Capital is an important sustainability story because it is unlikely that a firm like 3G would continue supporting the sustainability strategy at the heart of Unilever. Unilever’s CEO, Paul Polman told the Financial Times, it was:
“clearly a clash between a long-term, sustainable business model for multiple stakeholders and a model that is entirely focused on shareholder primacy.”
The World Bank will no longer finance upstream oil and gas ventures after 2019. (“Upstream” oil and gas refers to activities such as the exploration and extraction of deposits, drilling wells, and setting up rigs.) Approximately 1-2% of the World Bank’s $280bn portfolio is currently invested in oil and gas projects. In 2010, the Bank stopped lending to coal-fired power stations but has been under pressure to also stop lending $1bn annually for oil and gas in developing countries. The Bank says that it is on course to commit 28% of its lending to climate action.
“The World Bank has raised the bar for climate leadership by recognizing the simple yet inconvenient truth that achieving the Paris Agreement’s climate goals requires an end to the expansion of the fossil fuel industry.” Stephen Kretzmann, executive director of the Oil Change International.
While ESG-centric ETFs “only” pulled in about $830 million in assets, 2017 has been a formative year for ESG. With some 33 dedicated ESG funds now on the market, covering international and domestic equity and fixed income, investors have a lot of choices.
A certain class of investor is catching on that ESG is a core approach to investing, and the products that are out there are proving it. Not a single ESG fund has negative flows for the year so far. 2017 has been a foundational year in which the ESG message has been received loud and clear, and has produced some great research and resources:
ESG101.com – Built by MSCI, ESG101.com is a phenomenal collection of proprietary and independent thinking on ESG investing, and a great starting point for anyone thinking they want their money to reflect their values.
FactSet High Net Worth Study – This study is the source of countless great statistics, such as:
“90% of millennials want to direct their allocations to responsible investments in the next five years.”
U.S. Trust Wealth & Worth Study – This study includes a generational breakdown of interest and ownership in impact investing.
CFA Institute Perception Study – This looks at CFAs who advise assets rather than the asset owners themselves, revealing information such as the No. 1 reason that ESG use is limited is a lack of available ESG data.
AQR Study – A deep dive into whether ESG criteria which can be best summarized as: “Better ESG exposures predict lower future risk.”
Will 2018 be the year ESG finally “breaks out?”
While it’s possible that 2018 could make for a brilliant year in ESG flows, ESG as an investment theme doesn’t need a “breakout” year. What it needs is slow and thoughtful product introduction, a commitment by the industry to investor education, and an eye on risk management for the long term. That’ll be good for investors, and the companies in ESG portfolios.
Investors are increasingly looking to ESG ETFs as a means to diversify their portfolios. ESG principles align investors’ values with investment goals.
“Really, it’s a strand of responsible investing. The idea that you would screen or score companies based on their environmental scores, their social scores – how they treat their workers; how they treat their customers, and in their governance – the board structure, the share class structure.” Martin Kremenstein, Senior Managing Director and Head of ETFs for NuShares by Nuveen, said at the Charles Schwab Impact Conference.
Nuveen has launched a line of ETFs that screen companies of various market capitalization and asset categories for environmental, social and governance principles. This new line of ETFs includes NuShares ESG Large-Cap Value ETF (BATS: NULV), NuShares ESG Large-Cap Growth ETF (BATS: NULG), NuShares ESG Mid-Cap Value ETF (BATS: NUMV), NuShares ESG Mid-Cap Growth ETF (BATS: NUMG) and NuShares ESG Small-Cap ETF (BATS: NUSC). The ESG criteria exclude certain industries such as alcohol, tobacco, military weapons, firearms, nuclear power, and gambling, among others.
2017 was a year of climate catastrophes, dismantled legal safeguards, biodiversity loss, the buildup of plastic waste and other global problems. But inspiring breakthroughs and innovations in sustainability and conscious capitalism have emerged in response. 12 films from 2017, from feature-length documentaries to short animations, reflect what we’re up against, and what we are doing about it.
- An Inconvenient Sequel: Truth to Power 2017
- Plastic China
- Chasing Coral
- Saving National Parks
- Heineken The Cities Project: The + Pool
- What Sustainability Means To Us
- Earth Overshoot Day 2017 Lands on August 2nd
- We Live Here Together
- The World is Poorly Designed. But Copying Nature Helps.
- WASTED! The Story of Food Wasted
- The Story of Microfibers
- Optimistic Nihilism
Farewell, 2017. Let’s look back at 5 notable moves in the world of social enterprise, conscious capitalism and impact investing:
Blockchain for good – An increasing number of social enterprises started tapping blockchain technology, the digital tech underlying Bitcoin, to give struggling low-income people who conduct transactions in cash (the unbanked) access to financial services.
More evidence that impact investing reaps healthy returns – It was a good year for research showing a profitable upside to impact. The Global Impact Investing Network (GIIN) published a report which found that, across private market strategies, such as private equity, fixed income, and real assets, the distribution of impact investing fund returns is similar to results for conventional markets.
Marketplaces grow up – The year saw the introduction, or relaunch, of some notable and highly scalable impact investing platforms. Toronto-based Social Venture Connection (SVX) connects accredited and non-accredited impact investors with social ventures and funds. ImpactUs, is a Washington, D.C based platform, where investors can connect with funds, operating companies, projects, and businesses raising money through private debt, and equity offerings can list.
More heavy-hitters embrace impact investing and social enterprise. – In 2017, Calvert Social Investment Foundation changed its name to Calvert Impact Capital. They want to underscore their role in raising money through public and private capital markets and targeting investors looking to invest in communities which are not usually served by traditional financial markets. Another notable, startup accelerator Techstars, launched a program for for-profit mission-driven companies.
The Ford Foundation – In one of the most significant announcements of the year, the Ford Foundation earmarked up to $1 billion from its humongous endowment for Mission-Related Investments (MRIs) over the next 10 years. Investments will focus on funds targeting affordable housing and financial inclusion.
Future Ford Foundation Director Reflects on the Power of Impact Investing – Chief Investment Advisor
Managing director and co-head of Morgan Stanley’s ($2.3 trillion) Global Sustainable Finance team, Roy Swan, will ring in the New Year as a new Director of the Ford Foundation’s Mission Investments team. In this interview, Swan reveals how investing decisions improved NYC’s low-income housing, and what focus the Ford Foundation will have for future impact investments.
Morgan Stanley’s Global Sustainable Finance group formed an NYC distressed rescue strategy which helped rehabilitate nearly 700 rental units in the Bronx, the most famous example being 1520 Sedgwick Ave., known as the birthplace of hip-hop. 1520 Sedgwick was a case of landlord abandonment, with low-income residents left on their own in awful living conditions as the building sank into deep financial distress. By working with community-oriented partners, Morgan Stanley helped rescue the building from financial distress by improving the physical condition of the buildings and bringing value-added services, which enhanced the quality of life for its residents.
The Ford Foundation’s initial focus will be affordable housing in the US, and financial inclusion in emerging markets in the global south. The Ford Foundation wants to integrate the values of diversity, equity, and inclusion in investment strategies and in the larger field. This includes paying attention to the makeup of investment teams, where they invest and with what values.
For big food companies, water management is an imperative. As water scarcity and pollution steadily increase across the globe, companies simply cannot afford to keep ignoring water and other sustainability issues that will continually affect their bottom line.
Not only is the food industry at risk because of water scarcity, it are also largely responsible for it.
Agricultural production uses more than 70 percent of the world’s freshwater resources, and is the biggest polluter of the world’s waterways. Similarly, agriculture’s huge carbon footprint contributes to the volatile weather that is creating increasing financial risk for food companies.
The $5 billion food industry had already disclosed in 2016 that they’d faced $14 billion in water-related risks. Add to this the combination of population growth and climate change, and water becomes a serious sustainability issue.
Companies with strong board oversight on sustainability issues are proving to investors that they are serious about these issues. Because boards have a fiduciary duty to act upon material risks, they make climate and water risk part of their governance in order to survive investor scrutiny.
Triple Pundit’s Feeding Ourselves Analysis identifies the 5 biggest drivers of water risks:
- Climate change: Changing weather patterns will alter what can be grown and where, affecting global agricultural productivity.
- Growing competition: The food and agriculture sector’s water consumption will need to grow 20 percent to feed an additional three billion people by 2050, and food producers will be competing with rising urban demands for water.
- Weak regulations: America’s decision to weaken water regulations contributes to an already dangerous worldwide failing on water management. Smaller governments don’t have the political will or ability to manage competing water demands, maintain acceptable water quality, or enforce permits.
- Failing infrastructure: Water infrastructure systems are massively under-funded in both developed and underdeveloped countries. America alone needs to allocate $1 trillion over the next 25 years to its water infrastructure.
- Pollution: Water pollution from agriculture is rising. Agriculture, one of the world’s biggest water polluters through fertilizer and pesticide runoff, is triggering increasingly more deterioration of water quality as farmers intensify production to keep pace with demand.
Triple Pundit’s Feeding Ourselves Analysis also reports that of the 42 Big Food companies they benchmarked for water risk management, there was a stronger correlation between governance and performance across other areas such as operations and supply chain. According to their report, more than 90 food sector companies have flagged water risks in their earnings calls with investors so far this year.
In this interview, Peter Michaelis, head of sustainable investment at Liontrust Asset Management, talks about the shift of sustainable investing from a marginal part of the industry to a prominent consideration for investors. Referencing the UN PRI, he states that 70 trillion assets have now been assigned to the principles of sustainable objectives. He discusses how sustainable investing, which his firm has been involved in for over 15 years, has experienced rapid growth of more than 20% in all available strategies over the last three years.
Noting that sustainable investing has evolved from merely avoiding controversial industries to focusing on positive growth trends in ESG, he says increased interest in sustainable investing in Europe, the UK and more recently the US, is because people care more about making returns by investing in companies that have a positive impact on society and the environment.
The University of Leicester is offering a free online short course entitled ‘Concepts in Sustainable Development: An Introduction to the Key Issues’ that will explore some of the key issues in global sustainability. The free six-week course, which is open to all on the FutureLearn social learning platform, starts January 15th and is now open for registration.
The course will study the conceptual foundations of sustainable development and discuss the issues of sustainability as a complex problem. Topics will include the flow of energy and materials worldwide; social and political issues; wealth inequality; the impact of geography, history, and culture on sustainability today; and the problems of collective action. Finally, it will examine our resilience and prospects in the face of climate change and other global issues in sustainability and ask: are we doomed?
“To any scientist, the first step in finding a solution is to clearly understand the problem. We’re not going to present any simple solutions – there are none – but in this course, as a first step, we’re going to try to understand just why there are no simple solutions to the complex problem of sustainable development.” Professor Derek Raine MBE, Emeritus Professor of Interdisciplinary Science at the University of Leicester.
image: Grey Glacier, Chile by Ciprian Morar