5 Trends in Sustainable Finance
As is often the case, sustainability in finance is an important but overlooked aspect of sustainable development. We see the flashy headlines constantly about social and environmental sustainability, but without an economic backbone to support those efforts, they will continue to happen at a snail's pace.
Not only is it obvious that millennials and zoomers pay more attention to sustainable practises overall, but we’re starting to see a surge of success for many industries that are willing to take those very first steps.
1. ESG = Lower Risk
It has been mentioned time and time again that the implementation of ESGs in businesses will come about with success, but now we’ve got the data to back up those beliefs, with reports and records being made publicly available on a daily basis.
Research by Deutsche Bank, which evaluated 56 academic studies, reveals that companies with high ratings for ESG factors have a lower cost of debt and equity with 89% of the studies they reviewed showing that companies with high ESG ratings outperform the market in the medium (three to five years) and long (five to ten years) term.
In the first quarter of 2020, Morningstar reported 51 out of 57 of their sustainable indices outperformed their broad market counterparts, with them citing ESG analysis as being a core factor. The study concluded that 72% of Morningstar’s ESG-screened indexes exhibited five-year downside capture ratios below 100, indicating they held up better than the overall market during down periods between 2015 and 2019.
2. Immense Growth in Funding
We’ve all seen the headlines over the past few weeks, and the estimates are growing to match. From President Biden committing to achieve a 50-52% reduction in economy-wide net greenhouse gas pollution in 2030, to the UK beginning to implement laws to slash emissions by 78% by 2035.
However, it cannot be understated that this is an opportunity for businesses to learn, grow and gain funding for projects that wouldn’t have been seen as possible a few years ago. In the UK's Investment Association reporting, there has been a record inflow of £7.1 billion in responsible or sustainable funds in 2020, which is nearly four times the £1.9 billion sum that flowed into the first three quarters of 2019.
One of the most interesting revelations recently has also been that COVID-19 has heightened the concerns of both customers and investors. In a 2020 report by Bain & Company, 75% of food business leaders interviewed expected that sustainability initiatives would deliver permanent change, with them seeking to shorten supply chains and becoming more transparent, socially conscious and environmentally friendly.
3. Higher Returns
While the data for ROI is incredibly fresh and still being generated on a daily basis, we are starting to see some really interesting trends that reflect exactly what we had hoped.
In a 2021 survey, McKinsey discovered that 40% of businesses expect sustainability projects themselves to generate value in the next five years, with business leaders reporting forecasted value generation to be 'modest' or 'significant'. This seems to be across all sectors, except automotive assembly and telecom.
Even in longer studies, evidence seems to suggest that sustainable finance is the future of the economy. In a 2010 study collaborating with Harvard and London Business School, they found that an investment of $1 at the start of 1993 grew to $22.60 in 2010 through investment in high-sustainability companies, as opposed to only $15.40 for low-sustainability companies.
4. Increased Employee Satisfaction
We think it goes without saying that employees have much more loyalty and commitment to a company that satisfies their needs. Whether that be due to a tightening the wage-gap and removing the disconnect between hierarchies, or due to having aligned ideals and political motivations.
In The Future of Work: A Journey to 2022 published by PwC, it states that 65% of people worldwide want to work for a business with a powerful social conscience, while only 36% of HR professionals are building their talent strategies around their social and environmental conscience. This means that there is a dramatic gap in the talent recruitment and retention market just waiting to be seized and capitalised on.
We’re also starting to see trends of companies giving a more hands-on approach to sustainability and involving their employees in the process. Marks & Spencers, for example, has sustainability champions in each of its stores, ensuring each individual location can maximise their efforts towards reaching targets. This training and involvement at all levels keeps employees motivated and encouraged to be working for a business that suits their values.
5. Trailblazing Startups
While we can always look to the hundreds of stories of major corporations taking steps in the right direction and improving their standards when it comes to sustainability, it only makes sense to highlight the success of businesses who are implementing those strategies from the very beginning and seeing success because of it.
Arrival, a UK startup that produces zero-emission public transit vehicles has now obtained an estimated value of $13b, making it one of the largest-ever listings of a UK tech company.
Since 2015, the sustainable energy provider, Bulb, has seen an unrivalled growth in interest and quickly outpaced others in the utility sector. Their revenue jumped from £183 million to £823 million during the 2018-19 fiscal year, whilst growing their membership from 870,000 to over 1.6 million. Growth is only projected to continue too, since the obvious interest by the general public.
Conclusion
As more data is being made publicly available, we’re starting to see the competitive edge that comes from sustainable growth throughout all sectors. Whether you’re a startup with sustainability at the heart of your development, or a more traditional firm seeking to take steps in the right direction to protect your legacy, this is the time to make sustainable finance a reality in your business.
Funding, opportunities, and the chance to do some material good in this world has never been more achievable and we can work together to make it happen.
If you’d like to learn more about how Profit Impact can help you, check out the offerings on our website, or contact Sarah directly at sarah@profit-impact.co.uk.
Sources
- https://www.db.com/cr/en/docs/Sustainable_Investing_2012.pdf
- https://www.morningstar.com/insights/2020/04/06/how-did-esg-indexes-fare
- https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/22/fact-sheet-president-biden-sets-2030-greenhouse-gas-pollution-reduction-target-aimed-at-creating-good-paying-union-jobs-and-securing-u-s-leadership-on-clean-energy-technologies/
- https://www.gov.uk/government/news/uk-enshrines-new-target-in-law-to-slash-emissions-by-78-by-2035
- https://ifamagazine.com/article/ia-reports-record-7-1bn-flows-into-responsible-investment-funds-in-2020-so-far/
- https://www.bain.com/insights/sustainability-efforts-accelerating-despite-covid-19-disruption-snap-chart/
- https://www.mckinsey.com/business-functions/sustainability/our-insights/how-companies-capture-the-value-of-sustainability-survey-findings?cid=other-eml-dre-mip-mck&hlkid=a774e1a8976d4a078406df70a8406fd5&hctky=12808742&hdpid=3909306b-067b-4039-87ab-4a353ff490c8#
- https://www.hbs.edu/ris/Publication%20Files/SSRN-id1964011_6791edac-7daa-4603-a220-4a0c6c7a3f7a.pdf
- https://www.pwc.com/ee/et/publications/pub/future-of-work-report.pdf
- https://ssir.org/articles/entry/engaging_employees_to_create_a_sustainable_business
- https://sifted.eu/articles/arrival-nasdaq-listing/
- https://www.current-news.co.uk/news/bulb-net-loss-surges-to-129-million-as-revenues-and-members-rise
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