Sustainable investment continues to gain momentum

Every society represented at Davos this year undoubtedly has a saying equivalent to the American expression “Put your money where your mouth is”. The meaning should be clear: it’s not good enough to just talk approvingly about the need to resolve society’s problems; you need to get serious and invest in solutions.

To the great credit of many investors and business leaders around the globe, that appears to be happening. Sustainable investment has moved into the mainstream, not only rhetorically, as we heard at the UN Climate Action Summit and UN Sustainable Development Goals Summit last September, but as we saw again at the World Economic Forum and in financial data from around the world.

With some $31 trillion in sustainable investments at the start of last year, according to the Global Sustainable Investment Alliance, there is now clear evidence that growing numbers of large institutional investors are incorporating critical environmental, social and governance (ESG) considerations into their capital allocations and stewardship criteria.

Besides the “rightness” of these actions, there are other good reasons for making such investments as well. A recent analysis by several of my BCG colleagues, focusing on carbon emissions in three critical industries – chemicals, energy, and mining – found that companies with the lowest carbon emissions had valuations 12% to 13% higher than those with average emissions, and 22% to 25% higher valuations than those with the highest emissions, all else being equal.

Digging deeper, the analysis found that the magnitude and significance of the valuation differentials grew substantially over the last 10 years. More investors took action on climate practices – excluding companies with high carbon emissions from their portfolios – in the past five years than they did earlier in the decade. We expect this trend to continue, and probably accelerate, in the new decade as well.

More broadly, it’s clear that business leaders are becoming keenly aware of this. This was driven home last August when the Business Roundtable, which represents many of America’s largest corporations, acknowledged that publicly traded companies have obligations not just to shareholders, but to other stakeholders as well, including employees, customers, suppliers, the communities in which they operate, and society at large.

This should be common sense. After all, any company that doesn’t have the best interests of its customers, employees, suppliers and the public in mind probably is underperforming and short-changing investors. The two – as BCG’s ongoing research on total societal impact has found – are closely related.

Even Forbes magazine, an unapologetic advocate of free-market policies, has acknowledged that what Americans want most from big business is jobs, fair pay for workers, fair treatment of customers, quality products, strong environmental stewardship, and giving back to communities. In its ranking of America's best corporate citizens, the magazine said companies delivering on such values and, “taking the public interest into their own hands”, can generate better returns for themselves, while bettering society at the same time.

Traditionally, businesses have attempted to meet their somewhat amorphous societal responsibilities primarily through charitable giving. More recently, they have gone beyond that, incorporating sustainability and socially responsible practices into core business operations in ways that also are profitable.

Many investors are now demanding it. Oxford University’s Robert Eccles told Harvard Business Review: “When the CEO and the CFO are hearing about sustainability themes from the people who buy and sell their stock, that makes it become very real.”

Given these new realities, business leaders in the 2020s will need to rewire their managerial imaginations and decision-making, focusing on a new definition of corporate value that goes beyond predictable profit margins and steady dividend streams.

The public, policymakers, customers, employees and increasing numbers of investors expect it. And if present trends continue, they will soon demand it.

It will take entire industries to help solve society’s biggest challenges. Far-sighted leaders will see the need to meet these challenges as opportunities for reinvention and expansion. Rather than ignoring the risks ahead, or mobilizing their lobbyists and lawyers to block change, they will practice strategic statesmanship and build coalitions for collective action within – and beyond – their industries.

In the long run, as investment trends strongly confirm, they will be appropriately rewarded for their efforts.