Sustainability is the new mandatory

20 November 2019

Caroline HassHead of Sustainable Finance for Financial Institutions and SSAs, NatWest Markets

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The pressure on companies and organisations to act, as well as think, in sustainable ways is building. It will soon be irresistible.

Rising demand for the ESG evolution

Demand for environmental, social and governance (ESG) action including climate change and sustainability is higher than it has ever been, and continues to grow at a rapid rate. In part, it is the public consciousness that has changed. The shift built fairly gradually but manifested suddenly, and now consumers have begun scrutinising the sustainability credentials of the brands they buy and use. One in three consumers is basing their purchasing choices on the social and environmental impact of brands.[1] And we are beginning to see this demand take hold. Take high street fashion brand Zara for example, who announced recently that 100% of its products will be made from sustainable materials by 2025. 

Investing in climate change is heating up

Zara is not alone. In fact, there is increasing pressure for larger corporates and financial institutions to have an overriding sustainability strategy that includes sound environmental practices, as well as specifying their progress towards producing sustainable products. And in a KPMG survey of 1,300 CEOs globally, many view climate change and its implications to be both the greatest concern, and the greatest risk to their business. [2]

For financial markets and investors, sustainable investing, ESG and impact investing now constitute a major force across the globe. Added to this are multiple new tools and rating systems for ESG assets and investment products – which are also growing in use, popularity and sophistication.

While pressure is rising, so are opportunities

A rising number of green and clean-tech start-ups are now focusing on building a profitable company, while simultaneously helping to solve environmental problems. Given the speed of the ESG evolution, this agility is crucial. It not only helps these early movers to take advantage of the climate-related opportunities; agility also lets them capture and build profile quickly in the minds of consumers or asset owners.

We underestimate the willpower – and the firepower – of well-established corporations and financial institutions at our peril. The move to change their business models and strategies to include sustainability throughout has started and is significant.

The time for waiting to see is over

As we move towards a green economy, a company’s success will be measured by its ability to react quickly to the ever-changing technology and consumer needs. But alongside this, to satisfy investors and customers alike, it needs to take into consideration the long-term implications of its own decisions.

And to become future-proof in this way, it means incorporating an environmental and social lens, alongside strong governance.

This new world is still evolving. Many of the sustainable economy rules, its ecosystems and key players are still to be defined. But it’s already clear – in the attitudes of the public and investors alike – that the time for waiting to see is over.

DEEP DIVE

Growing Momentum

The momentum is building as Greta Thunberg’s recent speech at the United Nations demonstrated, that climate change and sustainability now lead global agendas – from a political, corporate, and increasingly, personal perspective.

Indeed, terms like climate change itself, as well as sustainability and ESG (Environment, Social and Governance) issues are ubiquitous in boardrooms, newsrooms and debating chambers alike, where just a few years ago they would have been fringe concerns.

In 2015, 195 countries committed to keeping the rise in world temperatures below two degrees Celsius for the first time ever in the breakthrough COP21 Paris Agreement. When it came into force a year later in November 2016, that commitment seemed like a far-away decarbonisation project, with plenty of time to tackle it further down the line, but time is running out to fully implement its intentions.

The view today is very different.

Media coverage, especially over the past year, has led to climate change and its potentially catastrophic implications. Demand for action on climate change, sustainability and ESG is higher than it has ever been, and is growing at a rapid rate. And a company’s environmental performance – that is, the ‘E’ in the ESG principles – is now a key factor in the decisions made by consumers and investors, as well as employees.

Corporations and financial institutions are increasingly expected to have an overriding sustainability strategy that includes sound environmental practices, as well as specifying their progress towards producing sustainable products. In fact, a May 2019 KPMG survey of 1,300 CEOs globally found climate change and its implications are considered to be both the greatest concern, and the greatest risk to their business.[3]

So what changed?

A new consumer revolution

In part, it is the public consciousness that has changed. In a shift that built fairly gradually but manifested suddenly, consumers have begun scrutinising the sustainability credentials of the brands they buy and use.

According to a Unilever study (January 2017), one in three consumers are basing their purchasing choices on the social and environmental impact of brands.[4]

But that study also suggests that the trend for purpose-led purchasing is greater among consumers in emerging economies than in developed markets. For example, 53% of shoppers in the UK and 78% in the US feel better when they buy products that are sustainably produced. This number rises to 85% for shoppers in Brazil and Turkey, and up to 88 %in India.

The personal becomes political   

But it goes further than interrogating the brands – the traditional mediators in passing on sustainable practices to all sides, from consumers through supply chain and manufacture – to the behaviours of those consumers in daily life. Another UK/US consumer survey by Futerra found that 96% of people feel their own actions – such as donating, recycling or buying ethically, ”can make a real difference in the world”. [5]

Meanwhile, and perhaps most startling, more than half of consumers believe that they can make a big difference personally.

But it also revealed an overwhelming demand, consumer-side, for brands to step up on sustainable lifestyles. 88 % of the respondents said they’d like help from their brands to improve their environmental and social footprint. Perhaps more immediately concerning for brands, 43 % claimed companies are actually making it harder for them to be environmentally friendly in their daily life.

Forward-looking brands are beginning to respond, not just with policies in small-print or bits and pieces of corporate social responsibility (CSR), but with companywide change. As mentioned, high street fashion brand Zara announced recently that 100 % of its products will be made from sustainable materials by 2025.

In this, sustainability isn’t just a nice-to-have, but a defining feature of the business.

Changing forces in the investment landscape

This shift is mirrored by a huge global growth in sustainable investing assets

At the recent launch of an industry-wide consultation on sustainability and responsible investment by the Investment Association – the UK’s trade body representing asset managers – CEO Chris Cummings saw the asset management industry “at a critical juncture in embracing sustainability as a defining feature of the investment landscape”.

The numbers bear out Cummings’ observations, with evidence from the 2018 Global Sustainable Investment Review suggesting that sustainable investing now constitutes a major force across global financial markets.[6]

At the start of 2018, sustainable investing assets in the five major markets stood at $30.7 trillion, a 34 % increase on the 2016 figure.[7] Sustainable investment now commands a sizable share of professionally managed assets in each region. Europe, the US and Japan top the rankings based on the value of their sustainable investing assets totalling $28 billion with Europe leading the way. [8] 

In Europe, total assets committed to sustainable and responsible investment strategies grew by 11 % between 2016 and 2018, reaching €12.3 trillion ($14.1 trillion). This increasing demand is also highlighted by the growing issuance of green and social bonds globally: there is now more than $600 billion in issues outstanding.

In 2019 so far, $173 billion in green bonds have been issued up to 30 September, with the expectation that over $250 billion will be issued by the end of 2019. As a result, over $1 trillion Green bonds are now outstanding globally. [9]

But this isn’t just a story about changes among larger corporates and financial institutions. Investors are also recognising the potential for start-ups to generate positive social and environmental impact alongside financial returns. The so-called ‘impact investing’ segment might be small, but it is vibrant, and more importantly, growing quickly. Its value is expected to pass $300 billion globally by 2020 – with over half of that coming from Europe – and to grow at an annual rate of 17.3 %.

The rise of sustainability performance metrics

The research and data show how climate change will continue to impact our daily lives. But since it will also impact the performance of our investments and savings, comprehensive climate rating systems are likely to grow in use and popularity.

One current example is Climetrics by CDP. Climetrics is an investment fund-rating scheme that delivers an independent climate impact analysis of investment funds. This enables investors to compare the climate-related performance of asset managers, while providing asset managers with a climate rating to highlight their climate-related focus or strategy.  But by no means is this the only one – a new industry is evolving grappling the complexity of measuring and combining climate-metrics with broader social and governance factors.

While pressure is rising, so are opportunities

A new breed of business is emerging that recognises these new priorities. They understand that the transformation to a sustainable economy is a unique, if not unprecedented opportunity to innovate and create new solutions for a market of gigantic size.

Rather than ‘tackling’ climate change issues, and treating it as a challenge or a risk as many traditional businesses have tended to, these early movers are proactively embracing the historic chance to benefit from the creation of new markets and products.

This allows for much easier selling compared to the effort of launching a product in a mature market because some of the high-entry barriers have eroded.

A steadily growing number of green and clean-tech start-ups are now focusing on building a profitable company, while simultaneously helping to solve environmental problems. Often supported through publicly and privately funded accelerator programmes, these green enterprises – often with flatter organisational structures and quicker turnaround times – are also able to create shortcuts with their innovations.

Given the speed of the ESG evolution, this agility is crucial. It not only helps these early movers to take advantage of the climate-related opportunities; agility also lets them capture and build profile quickly in the minds of consumers or asset owners.

Size still matters in terms of influence

We underestimate the willpower – and the firepower – of well-established corporations and financial institutions at our peril. The move to change their business models and strategies to include sustainability throughout is significant. And in the beginning at least, it’s chiefly their widespread products, and the changes and innovations they make to them, that will enable customers, employees and suppliers to make the most difference the quickest, ultimately reducing greenhouse gas emissions and the carbon footprint.

Financial institutions are a very good example of this shift to incorporating sustainability – within the full spectrum of ESG – into their business models. As they re-align lending policies, enhance their data collection and encourage supply chains to follow suit, they are changing business models while keeping climate change and social concerns front and centre.

As Mark Carney said during his Mansion House address in June 2019, “Firms that align their business models to the transition to a carbon-neutral world will be rewarded handsomely; those that fail to adapt will cease to exist.”

And indeed, the rewards look handsome. Research shows that adopting a greener agenda can not only boost sales, but can bring broader financial and non-financial returns too. A recent Hermes study found that companies with the weakest ESG credentials tend to trade with the widest credit default swap spreads. [10] This is an indicator that a corporate focus on ESG reduces a firm’s risk, and therefore its cost of debt capital. Meanwhile, another survey covering 2013-2017 showed that green bond issuance can lead to share-price outperformance. It also reported an improved return on assets and ESG metric outperformanceattracting more long-term investors.[11]

Is sustainability an indicator of corporate strength?

It does seem as though there is a correlation between sustainability and better performance across the board, too.

As more plentiful data becomes readily available, equity investors are suddenly able to track and highlight enhanced returns from investments in ESG-focused companies in ways they often weren’t before. And that data is revealing some surprises.

Using back-tested returns, BlackRock’s research showed that ESG-focused indices consistently either matched or exceeded the returns made by their standard counterparts, amid comparable volatility.[12] Furthermore, ESG portfolios were also more resilient in market downturns, partly because of the greater vigour associated with their sustainable strategies

And empirical evidence shows that organisations that are thoughtful when making strategic decisions (whether that’s concerning their products, employees or customers) increase their financial returns.

These correlations are especially strong in the current environment, amid the sea-change that has seen long-term effects starting to be considered and valued versus short-term financial gains.

A company’s success will be measured by its ability to react quickly to the ever-changing technology and consumer needs. But alongside this, to satisfy investors and customers alike, it needs to take into consideration the long-term implications of its own decisions.

And to become future-proof in this way, it means incorporating an environmental and social lens, alongside strong governance.

This new world is still evolving. Many of the sustainable economy rules, its ecosystems and key players are still to be defined. But it’s already clear – in the attitudes of the public and investors alike – that the time for waiting to see is over.

Practising what we preach: Committing to the ESG evolution

We’re putting ESG thinking at the front-and-centre of what we do. 

Since 2018, we have helped our clients raise approximately US$13bn billion to fund environmentally and socially beneficial projects for the likes of KfW, Vodafone, SSE, Yorkshire Water, Société du Grand Paris, TenneT, Orsted and IADB. And that figure doesn’t include liability management transactions – nor ESG strategies that have been fulfilled away from Green, Social and Sustainable bonds including SDG bonds.  In addition, NatWest Markets (NWM) developed its own ESG Product Framework, which enables NWM’s treasury, short term investors, and development banks to fulfil their sustainability objectives. Since launching this framework, we have received ESG certificate of deposits (CDs) in excess of £100 million from a broad range of investors including retailers, utilities, local authorities and micro-finance firms (figure as at end-October 2019).

Our sustainability footprint is considered throughout the organisation, and at all levels – from the Executive Committee to recently hired analysts and associates. This approach will ensure that we are able to advise our clients as partners with a solid understanding of the challenges and opportunities that the ESG evolution will bring for all of us.

How we’re doing it: Being a sustainable business in 3 key areas 

1. Green and social financing solutions

We’re lending, arranging, advising and structuring green finance for a low-carbon generation. This includes energy efficiency by supporting renewable energy programmes, including wind and solar projects, as well as reducing clients’ operational carbon footprint through public market transactions.

Social finance is also a growing focus for NatWest Markets as the demand – both from issuers and investors – matures through methodology and underlying data. As this market segment evolves, NatWest Markets will stand fully aligned with our financial community as social implications become part of the ‘greening’ solutions.  

2. Creating ESG investment opportunities

As the investing community embraces sustainability, we will be offering environmentally and socially tailored products to meet investors’ sustainability strategies, as well as regulatory requirements. The investment options are already diverse – across currencies, maturities, issuers and products, including recent Green Securitisation guidelines where NatWest Markets was actively involved in the Association for Financial Markets in Europe’s (AFME) Working Group.

3. Managing our own carbon footprint and driving internal awareness

How is NatWest Markets making progress in our mission to become a responsible business prepared for the transition to the green economy? We’re meeting our wider footprint objectives by reducing the environmental impact inside our business – from developing energy efficiency projects for our own estates, to using renewable energy for our electricity consumption and reducing our business travel footprint.  The analysts and associates have embraced this vision through a Sustainable Finance Champion network that supports business areas to cleaning up Brighton Beach.

Meanwhile our colleagues are actively encouraged to make more of their personal contribution to a new, low-carbon economy; and we promote and develop sustainable strategies and products across the firm. Internal ‘teach-ins’ are occurring throughout the organisation – from town halls to joining departmental meetings and off-sites to increase education around the topic. As sustainability is integrated into the daily operations, new and exciting opportunities will arise to support our clients as they progress along their sustainability journey.

An enterprising approach as the new landscape evolves

The ESG revolution brings opportunity for clients, and it’s our job to help maximise them – both to accelerate sustainability across industries, and create a better, more environmentally friendly community in the future.

We have a great deal of experience in establishing and marketing green and social finance issuance across all major bond and loan markets– all of which means we’re ideally placed to support clients through investing and issuing sustainably. 

NatWest Markets is looking forward to working together with our clients, learning as the ESG evolution takes hold. We very much see the opportunities that sustainability can bring for clients and ourselves. Working together will facilitate and accelerate sustainability across the board, whilst creating a better environment for all stakeholders in the future.

 

[1] Unileaver study January 2017

[2] https://assets.kpmg/content/dam/kpmg/uk/pdf/2019/06/uk-ceo-outlook-2019-agile-or-irrelevant.pdf

[3] https://assets.kpmg/content/dam/kpmg/uk/pdf/2019/06/uk-ceo-outlook-2019-agile-or-irrelevant.pdf

[4] https://www.unilever.com/news/press-releases/2017/report-shows-a-third-of-consumers-prefer-sustainable-brands.html

[5] https://www.forbes.com/sites/solitairetownsend/2018/11/21/consumers-want-you-to-help-them-make-a-difference/#157693736954

[6] Sustainable investing including ESG investing, impact investing and socially responsible investing -

[7] www.GSI-Alliance.org    2018 global sustainable investment review

[8] www.GSI-Alliance.org  2018 global sustainable investment review

[9] https://www.ft.com/content/f9baa3b8-f51d-11e9-b018-3ef8794b17c6

[10] https://www.hermes-investment.com/ukw/wp-content/uploads/2019/02/hermes-credit-newsletter-spectrum-november-2014.pdf

[11] The survey looked at the 217 corporate green bonds issued by public companies globally from 1 January 2013 to 31 December 2017. ‘Green bonds benefit companies, investors, and the planet’, Caroline Flammer, Harvard Business Review, November 2018.

[12]  ‘Sustainability: the Future of Investing’, BlackRock, February 2019.

ESG/Sustainability


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