Interview: Finance is central to the sustainability challenge, feels HSBC

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Nick Robins, Head of HSBC's Climate Change Centre of Excellence, talks about the strategic implications of low-carbon growth and climate resilience for finance and investment.

Nick Robins has worked on the policy, business and financial aspects of sustainability since the late 1980s, with time spent at the Economist Intelligence Unit, the European Commission’s Environmental Directorate, the Business Council for Sustainable Development, the International Institute for Environment and Development, and Henderson Global Investors, where he was head of SRI funds prior to joining HSBC where he currently heads the Climate Change Centre of Excellence.

How do you define a sustainable company or a company investing in sustainability?
Defining a sustainable company is both simple and hard. A sustainable company is one which has aligned its business model with the overall goal of sustainable development – one whose goods, services and value chain are positively contributing towards meeting human needs while reducing the overall impact of its activities on the environment. As we are dealing with a variety of market failures and the necessary policies to reward sustainability are not yet in place, we find very few absolutely sustainable companies. But a growing number are changing course – and we need to focus on a company’s strategy and trajectory as much as its past performance.  .

What in your opinion is the level of investor interest in sustainability? And how much capital is seeking sustainable companies?
In the last 5 years, there has been a quiet revolution in investor awareness on sustainability and corporate responsibility. We’ve had ethical and social funds for over 20 years as part of the wider green consumer wave. But the standard belief in capital markets was that if you incorporate environmental, social and governance factors, then you automatically constrain the investment universe, increase the risk and thereby reduce the return. But this assumption is breaking down  in the face of mounting evidence of the materiality of a range of key performance factors such as business ethics, employee engagement, customer satisfaction, community relations and environmental, health and safety.

After the Gulf of Mexico oil disaster, no investor can say that poor management of sustainability does not have an impact on share prices. Investors are now much more interested in Corporate Resilience - the ability of a company to survive shocks.  Set alongside this is the growing investor interest in sustainability driven investment themes around clean technology, climate change, sustainable agriculture and water security, which offer considerable potential for long-term capital growth.

A good indicator of rising investor awareness is that USD 68 trillion assets under management around the world have signed up to the Carbon Disclosure Project (CDP), which calls for better reporting on climate risks and opportunities from the world’s top companies. In addition, about USD25 trillion in assets under management have signed up for Principles of Responsible Investment (PRI), a voluntary commitment by investors to integrate environmental, social and governance factors into their investment decision making process. Finally, another USD5 trillion assets are invested in specifically badged sustainable and responsible investment (SRI) funds.

What is the link between sustainability and return?
Currently the market is mispricing sustainability – in other words undervaluing the contribution that competent management of environmental and social factors make to long-run shareholder returns . In our book, ‘Sustainable Investing: the art of long-term performance’, we showed that funds that integrated these factors out-performed conventional – or shall we say, old-fashioned funds – on each time period. Looking ahead, the out-performance could grow as more structural shifts take place as a result of climate change. .

Going with that thought, do you feel sustainability is going from ‘good to have’ to ‘need to have’?
Yes, I think that is right. We see a move away from simply a philanthropic focus area of giving back to society to a more strategic emphasis on the aligning the whole business. We should not downplay the importance of philanthropy, particularly in countries such as India with its strong traditions of social investment by major business houses. But these activities are generally ignored by the investment community. What is more important now is whether management is on top of the critical factors that will determine business success in the years ahead – and the complex agenda of sustainability is one of these .

This shift is reflected in Professor Michael Porter’s focus on Creating Shared Value (CSV)) instead of CSR. According to him, success going forward will be determined by companies taking on the global challenges facing their societies or sectors and by successfully dealing with them such that they not only create value for their shareholders but also value for the society. The main challenge for companies now is how to align sustainability as a driver with their business strategy.  

You have been known to talk of translating soft consensus around climate change and sustainability among investors into ‘hard action’. What steps can investors take on that front?
There are three things investors can do. First, they can allocate their capital differently. In the context of climate change that would specifically relate to clean tech investments, be it in the form of private equity or infrastructure. Or with regards to mainstream investments, investors can tilt their portfolios such that they invest more into companies following sustainable strategies.

Second, investors can use their rights and obligations as owners to ensure that the companies they own are applying best practices . That can be done informally through engagement or more actively through shareholder activism.

Third, investors need to get involved in policy making. Climate Change is a market and policy failure. It’s a policy failure because many governments are rewarding activities that are harmful in context of climate change. For example, many governments are still subsidizing the consumption of fossil fuels. There also exists market failure whereby externalities such as carbon are not priced. Increasingly, institutional investors recognize that climate change will damage their portfolios in the long-run, and that sensible market-friendly policies are needed to mobilize capital. Thus, in the run-up to the Copenhagen climate conference more than USD13 trillion in investment assets supported an ambitious global deal. In many respects, investors are the missing stakeholder in climate policy-making. Scientists, governments, NGOs and industry have been there for the beginning. But investors have only got involved recently – and I believe will become more and more active in the years ahead.

What are emerging standards being used by investors?
There isn’t any single standard being used by investors, and I think we may never be able to get to a single standard because sustainability is partly subjective and different societies will have different priorities. Investors in France are more concerned with the social and human rights issues; in the UK they are more concerned with the environmental issues. What is happening is that the underlying data is converging with major players such as Bloomberg, FTSE, MSCI, and S&P getting involved only with specialists such as EIRIS, TRucost – and in Asia, Responsible Research.

What are the commercial consequences of not investing in sustainability initiatives?
I think there are positive as well as negative consequences. The first investment risk from not managing sustainability is the threat to business operations from poor practices, leading to major industrial incidents as well as regulatory intervention. The second is the threat of resource constraints, for example, water scarcity leading to the closure of the power plant.

On the positive side, there is evidence that sustainability can be a driver for employee engagement and there exists a strong correlation between employee engagement and better customer satisfaction which in turn leads to better returns for the company and investors. Particularly in large multinational conglomerates, sustainability can be glue which can bring the employees across cultures together. And the other positive is of course the growth in terms of products and services from the fast growing market related to sustainability like the clean technologies and other areas included in the wider sustainability tangent.

What is the role of financial institutions in enabling the environment for sustainable development?
- Finance is central to the sustainability challenge. In many cases, the sustainable option involves higher  upfront capital costs, balanced by lower operating costs. It’s the job of finance to bridge this gap . There’s growing interest in extending the scope of finance from private and listed equities into fixed income, with the launch of a new generation of climate or green bonds.

What is the experience with emerging markets?
In this age of globalization, some of the greatest innovations in sustainable investing are coming from emerging markets  For example, Brazil’s stock market, the Bovespa Exchange, is perhaps one of the most advanced in the world, while South Africa is leading the pack on corporate governance. Traditionally, many Western investors have been looking to the developing countries as a source of sustainability risk; now the perspective is more rounded.

India is a country which has untapped potential for sustainable investing. It has a large ‘moral middle class’ evidenced by the high profusion of NGOs, a large diaspora and growing investment wealth. If you put these together, the potential for SRI is huge .

This interview was conducted by Aparna Khandelwal from India Carbon Outlook.

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