Being sustainable should make your company more money, but it is incredibly easy to fall into the thought process that everyone is doing it, and to claim a quick buck, says Aidan Bell. We need the future leaders of business to be better than that
When assessing the success of sustainable companies, the method that is most looked to is the Environmental Social and Governance (ESG) rankings. They are a variety of non-financial factors that are reported alongside the more traditional measures by listed companies and allow investors to make objective decisions about a company’s sustainability.
There is significant evidence that companies with a strong focus on ESG are outperforming the market. A meta analysis of papers published between 2015 and 2020 found that Green, or environmentally friendly, companies have generated significantly higher stock returns compared to their brown peers in recent years. This gap in the average returns of green and brown stocks was more pronounced during the first COVID-19 (coronavirus) wave last year, when the market crashed.
Morningstar Inc. also showed the Morningstar US sustainability Leaders Index – representing the 50 US companies with the best ESG scores – returned 33% for the year, beating the broader US market by more than 8%. A broader basket of sustainable companies returned 29.1% in 2021, three percentage points better than the overall US stock market.
McKinsey gives five reasons why this could be true. The first is top line growth as more sustainable consumers align with your brand and other companies look for like-minded companies in their supply chain. The second is simply that being resource efficient is also cost efficient, and third is that you’re less likely to fall afoul of regulatory environments. The fourth is recruitment and retention of talent, as people, particularly the young, prefer to work for companies with a mission. The fifth reason is that there is less chance of assets becoming stranded, like coal mines or oil tankers.
This wasn’t, and indeed isn’t, an obvious conclusion. The less sustainable companies could be under-priced simply because they look less attractive to a portion of investors, and therefore the more sustainable companies being overpriced compared to the market.
Surely therefore, this is an instant where doing the morally correct thing is a given, where higher returns are indicated and you can go with the choice that allows you to be proud of the work that you’ve done every day. The next cohort of entrepreneurs and senior executives seeing this data will surely continue to make ethical choices.
High stakes
With high stakes on ESG comes the temptation for fraud, but also the reality of looking at what they actually stand for. In the UK, Boohoo, a fast fashion brand that claimed high ESG points was recently in the public eye. However fast fashion itself is an environmentally damaging industry with cheap delivery which contribute to huge plastic waste. Throw in the host of related party transactions and poor working conditions, including slave-like facilities a factory in Leicester, and the company managed to fail at all three ESG hurdles.
The infancy of the sector leaves it more open for abuse, but the regulator is catching up with. The Security and Exchange Commission (SEC) has created a climate and ESG Task Force to help identify misconduct and analyse data to identify potential violations. It also created a website to receive ESG-related tips, referrals, and whistle-blower complaints.
Then there are the questions about ESG ratings themselves, and how much of the component is based upon the ‘Environment’ with Tesla recently removed from the S&P 500 ESG Index whilst ExxonMobile remain placed highly. The reason that Tesla haved dropped out is obviously highly linked to Elon Musk and his form of Governance, but who unsurprisingly calls the whole ESG system ‘a scam’.
Greenwashing
But how do the public manage at seeing through the claims? Greenwashing to general consumers is widespread with many claims that seem authentic. Global Web Index has indicated consumers to be less concerned by third-party certification than a general feel for the brand. If true, this is a further worrying development, similar to the degradation of trust in experts like scientists and elected officials (outside of a recent bump during Covid).
It is almost expected that highly polluting industries like oil and gas, Air Travel and Car manufacturers will Greenwash, and they do. Oil & Gas companies have spent millions lobbying to weaken climate change policy whilst mentioning climate change related keywords rise sharply in their annual reports (BP moved from 22 in 2009 to 326 by 2020). Airlines are profligate creators of targets, but UK airlines were found to have all but one targets that they have set, they simply create another great sounding target for a soundbite. For car companies the most high profile example was by Volkswagen who manipulated their fuel efficiency tests, but they are far from the first, and it’s hard to imagine that they will be the last.
But what about companies that the public might have reason to trust on sustainability, those that appear as though they are green? People don’t have infinite time to conduct research on products, and even if they did most people would not know how to objectively evaluate the claims made by companies.
As plastic pollution has risen in people’s mind there has been a continued development and growth of ‘compostable plastic’. The problem with this is that most of them are only industrially compostable, and not home compostable. This means that there is no waste stream to send them to, if they go into plastic recycling they cause huge issues, and if they go to general waste, they are generally in an environment lacking oxygen and don’t break down. Be careful therefore with ‘compostable’ coffee capsules, they’re probably the worst way to start your morning. All the companies making these claims know this.
Other examples of greenwashing that I see all the time include ‘Zero waste to landfill’, which usually just means that most of their waste is incinerated for energy. Then there are often meaningless words without numbers ‘keeping virgin materials to a minimum’ or conversely ‘maximising recycled materials’, not to mention just using the words ‘ethical’ or ‘sustainable’.
Counter opinions
Be aware of what you’re reading and look for companies that have a sustainable ethos in everything that they do. Use search engines and look for counter opinions.
The thing that none of this tells you is how hard it can be to do the right thing. Although theoretically you might believe that an environmentally friendly company might outperform the market when you’re making a decision that might cost you more in the short or medium term, the temptation to cut corners exists. Then you might also be under pressure to contradict your own morals.
I’m lucky to have a co-founder as equally committed to continually making the sustainable choice. We’re also still a small company without external shareholders capable of exerting pressure. There are numerous decisions in the past that have cost us revenue, and there are decisions we make on our own products to make them more sustainable, which almost none of larger construction company clients care about. These cost us money, but we know it’s the right thing to do, and we hope that eventually the rest of the world will see an honest brand and the long-term value will come. Conversely, we are now established enough that not making the sustainable decision would destroy all the brand equity that we have so far built.
Conclusion
Being sustainable should make your company more money, it should become more investable as well as making the world a better place. However, you need to be honest and if you care about the environment be willing to be one of the whistle-blowers that the SEC now recognises. It is incredibly easy to fall into the thought process that everyone is doing it, and to claim a quick buck. We need the future leaders of business to be better than that. The world needs you, and it should benefit your shareholders too.
Dr Aidan Bell co-founded EnviroBuild, with the aim of reducing the embedded carbon within common building products, whilst maintaining quality and value – making the sustainable choice the easy choice.
Originally focussing on combining recycled plastic and wood offcuts in wood-plastic composite decking EnviroBuild’s range now encompasses non-combustible balcony solutions, composite cladding and fencing, porcelain, internal flooring, and garden furniture and around 50 staff. Previously Aidan has founded a £25M turnover solar company, worked as a consultant for Deloitte and achieved a PhD in Inorganic Chemistry from the University of Manchester.
