By Tom Kiely, Lenny Mendonca and Steve Westly
What do CalPERS, and many of the world’s largest sovereign wealth funds from Scandinavia to the Mideast have in common? They’re betting big on sustainability.
In May, the California Public Employees’ Retirement System, a $307 billion retirement fund, said it will require its asset managers to factor environmental and social risks into their investment decisions. Norway’s giant national sovereign wealth fund, with $890 billion in assets built off its oil and gas reserves, is divesting from companies that mine or burn coal. A majority of the world’s largest institutional investors — pension funds, insurance companies, sovereign wealth funds — incorporate considerations about a business’s environmental and social track record into their investment decisions.
However, too many company managers are still under the spell of the myth that shareholders are the only stakeholders who count. For decades, neo-classical economists suggested — and business schools taught — that sustainability investments unnecessarily raise a firm’s costs, creating a competitive disadvantage. Invest in anything but the bottom line, and you risk your survival we’ve been told endlessly.
Shareholder idolatry holds executives back from making the investments they should to benefit the planet and their businesses in the long-term. For every corporate leader there is a regiment of laggards.
Sure, most of the Standard & Poor’s 500 companies issue sustainability or social responsibility reports each year, but try reading those reports — they are a catalog of the tepid. Few companies integrate social and environmental factors deeply into their business strategies. U.S business organizations, such as the Chamber of Commerce, have opposed government-led efforts to reduce climate risk as overly bureaucratic and costly for business, while doing little to further business-led initiatives to improve corporate sustainability.
That’s a big mistake. For instance, in one recent study, three Harvard Business School professors showed how “firms with good performance on material (our emphasis) sustainability issues significantly outperform firms with poor performance on these issues.”
When it comes to these investments, the materiality test is crucial. Companies make all kinds of investments in sustainability and in corporate social responsibility programs. But only some of these things have a material impact on performance. The researchers looked at a set of environmental, social, and governance measures that both companies and their investors deemed material and measured their impact on stock prices.
What did they find? Studying the performance of over 2,000 companies in six sectors, the researchers discovered the stock price of companies that invested to improve sustainability in ways that were material to their businesses outperformed companies that did not.
This makes sense to a growing number of investors. Smart sustainability investments allow companies to attract better employees, improve their brands to sell more or sustain a price premium.
What should be done? Companies must do a better job of compiling non-financial data on their environmental and social performance and report it to investors and other stakeholders. Fifty percent of institutional investors surveyed by PricewaterhouseCoopers in 2014 said they were dissatisfied with the environmental-social-governance information companies provided.
Business leaders need to step up and champion these efforts.
Also, executives should act like leaders in policy debates. In early June, 80 companies, including U.S.-based Coca-Cola and Mars, pressed the British government to fight for strong action against climate change in international talks, and to aggressively push for a long-term low-carbon plan for the United Kingdom.
Where are U.S. business leaders on this?
Business leaders should propose a concrete plan for pricing carbon, for instance. After all, more than 150 companies already factor a carbon price into their business planning decisions, according to a recent study by CDP, a sustainability measurement organization. Executives have the public clout to elevate the debate on carbon pricing, and the experience to propose pragmatic frameworks for getting this done.
Corporate executives need to stop thinking of sustainability as a political discussion, and see it for what it is: good business.
Tom Kiely is a member of the Standards Council of the Sustainability Accounting Standards Board. Lenny Mendonca is a consultant to leaders in the public and social sectors. Steve Westly, a former state controller, is managing director of the venture capital firm the Westly Group.