The past 12 months have been a rollercoaster for the sustainable investment industry. From the signing of the Paris Agreement, to the election of Donald Trump, the recent Recommendations report released by Michael Bloomberg’s Task Force on Climate Related Financial Disclosure and the roll out of the UN’s Sustainable Development Goals (SDGs). This article attempts to make a few forecasts for 2017 but it comes with an obvious health warning: if we learned one thing from 2016, it’s that we should treat all predictions with extreme caution!
So what sustainability issues might drive corporate and investor action in 2017?
1.” Low-carbon” investments hold firm under Trump presidency
A question at the forefront of many investors’ minds is what the election of Donald Trump means for investments in clean energy. The president-elect has not ruled out pulling the US from the Paris Agreement, but despite the rhetoric of his election campaign, the ‘genie is out of the bottle’ when it comes to renewables. The cost of renewable energy generation from solar and wind has already come down significantly and will only fall further with greater economies of scale. Coal can no longer compete on the basis of cost-efficiency in all markets, so we are unlikely to see a grand resuscitation of the coal industry.
Countries all over the world, from Germany to Uzbekistan, have managed to decouple GDP growth from greenhouse gas emissions.
While the withdrawal of the world’s biggest economy would surely be a blow to the Paris Agreement, it would not be fatal. Rather, other signatories like China and countries in the EU, along with US states and cities, would take the lead in its place. China has said it plans to close 1,000 coal mines, and increase wind and solar power by 21% and encourage its citizens to eat less meat for environmental reasons. All signs to investors that now more than ever, they must be conscious of the risk that high-emitting assets could eventually become ‘stranded’.
Corporations are also invested heavily in the low carbon transition. More than 100 companies have called for action on the Clean Power Plan (CPA), the Obama Administration’s signature plan to reduce CO2 emissions from electric power plants, with tech giants like Apple and Google even filing a legal brief in support of the policy. The number of companies that have signed the RE100 commitment to use 100% renewable energy is also growing – with companies like Microsoft, Walmart and BMW all shifting towards renewables.
Further encouraging the development of clean energy is the explosive growth of the green bond market, which in the past year has grown to over $100 billion. This trend is set to continue in 2017, as countries like Sweden, Nigeria and Kenya have set up inquiries into the issuance of sovereign green bonds.
2. “Corporate Sustainability Governance” becomes mainstream
Many investors expect the coming year to see corporate sustainability governance further embedded in the business processes of the companies they invest in. It is becoming the norm for companies, at the very least, to monitor, manage and report on sustainability.
In 2017 this will be catalyzed by the introduction of new requirements in the European Union to report environmental, social and governance (ESG) policies, risks and other information – that will affect around 6,000 large companies, banks and insurers; and also by the recommendations of the Mark Carney/Michael Bloomberg Task Force on Climate-related Financial Disclosure (TCFD), released in mid-December. TCFD urged companies to integrate climate-related information in their mainstream financial reports and to describe the impact on their business of aligning with a global target to keep temperature rise below 2 degrees Celsius.
This is likely to have repercussions not only for business but also for financial institutions. The recommendations further underline the importance for banks to consider how the climate exposure of the companies they lend to impacts their risk levels and the essential role they can play in financing our transition to a “low-carbon” future.
It is now up to governments of the G20 to consider whether climate disclosure should become mandatory. Regardless, the task force’s recommendations increase the likelihood that 2017 will be the year when the world’s major corporations get serious about sustainability governance.
3. A more holistic approach to human rights emerges
For many years the human rights spotlight has tended to fall on one particular raw material such as ‘conflict minerals’ or ‘cobalt’. In 2017, we can expect companies to begin to take a more holistic and systematic approach to human rights management. More and more companies are using tools such as the UN Guiding Principles on Business and Human Rights and related Reporting Framework to ensure human rights violations – including low pay, child labor and unsafe working condition - are prevented across their entire supply chain.
In the last few years, we have seen a plethora of regulation such as the UK Modern Slavery Act, EU Conflict Minerals, public benchmarks including the Corporate Human Rights Benchmark and KnowtheChain, and more recently board of director guidance from the UK Human Rights Equality Commission supporting accelerated action and disclosure by companies.
4. Sustainable development becomes big business
More and more companies will start to align their business strategies with the Sustainable Development Goals (SDGs) in 2017 to help them manage risk and anticipate future regulation. For example support for SDG 6 (clean water and sanitation) and SDG 7 (renewable energy) is driving demand for innovations in eco-efficiency, especially to better manage carbon emissions and water use. This presents an opportunity for the private sector, as evidenced by the strong growth experienced by companies championing new technology.
For example, US-based Xylem makes innovative water treatment systems and recently acquired a company specializing in water meters, a key aspect of sustainable water management. It has seen its stock price increase by 40%. Similarly, Spirax-Sarco, a British manufacturer of steam systems and pumps that reduce energy and water consumption is projected to increase earnings per share by nearly 30% in 2016.
Our engagement with companies like Statoil, to persuade them to redirect capital spending away from Canadian Tar Sands, is part of our efforts to encourage companies to take action on the SDGs through Active Ownership. Diminishing resources means the world will increasingly have to move towards a circular economy, where items are reused or recycled rather than thrown away. Business can also lead the way here. For example, IKEA is expanding its circular operations, reselling used furniture and using leftover textiles to create new products.
The SDGs are supporting a more systematic review and disclosure on how companies can develop quantitative measures to report and better manage their environmental operational and value chain footprint.
5. Corporates target consumers to help reduce waste
Growing public attention to the environmental and social impact of business has also led companies to rethink their product design processes. Many now apply life cycle planning to ensure less waste - by for example designing smaller caps that use less plastic, or bottles made out of recyclable material.
The next step is for consumer-goods companies to work with their customers to encourage less waste and water usage. During a severe drought in Brazil, Unilever launched the ‘#1RinseIsEnough’ campaign under its Omo detergent brand to encourage customers to use less water. 2017 could see these kinds of campaigns become commonplace.
Our ongoing engagement focus on Eco-Efficiency supports our investment thesis that forward-thinking companies have the opportunity to take a unified approach to retooling their products, processes, and policies in order to achieve sustainable profitable growth. Companies can create desirable products that enable energy productivity—and organize production in efficient, zero-waste ways that also improve margins. They can align operations and activities with sustainable natural resources. Doing so will enable a win/win scenario for investors, communities, employees, and the planet.
These are the themes we are focused on as we look for innovative companies to invest in and engage with in 2017.
In the new year, ‘business as usual’ is not enough
The world is headed towards a tipping-point, where the effects of environmental degradation, climate change and continued oppression of vulnerable populations could become irreversible. Addressing these challenges will require urgent action, a mobilization of vast sums of private capital and a significant break from ‘business as usual’. The past year has already seen some promising results – progress that must not only be continued but greatly accelerated in 2017.
The information in this document should not be considered a recommendation to buy or sell any security.
Lauren Compere is a Managing Director at Boston Common Asset Management.