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Why Mindful Money covers Sustainability

  • 1 February 2012

But there is also a growing recognition that environmental, social and governance (ESG) factors are increasingly important to the value, as well as the values, of all companies. The point has been driven home by recent examples ranging from the woes of RBS and News International (governance failures) to the BP oil well leak in the Gulf of Mexico (environmental failure) and various companies discovering that their suppliers use child labour (social failure). Most recently, the company that makes the mascots for the London 2012 Olympics has come under fire after accusations that the toys are "made in Chinese sweatshops".

Much of the focus has been on environmental issues, because they are often the easiest to spot and to quantify. The biggest of these is climate change, which is now an institutional reality as much as an environmental one – at the recent Durban climate summit, every significant economy agreed that they must take action to cut their carbon emissions and while the structure of an international agreement remains elusive, there is a wealth of activity at national level even in countries seen to be dragging their heels in the issue such as the US and China.

Meanwhile, there is a price on carbon in Europe, regulations to force businesses in all sectors of the economy to pollute less and a whole range of support measures to encourage the adoption of more sustainable technologies.

But there is a whole host of other issues, too, that need to be taken into account – the growing scarcity of water and other resources, deforestation, the collapse of fisheries, air and water pollution to name but a few. Social issues include the use of child labour, health and safety, worker rights and human rights, while governance concerns include excessive pay and have galvanised protests such as the Occupy movements around the world.

In addition, a number of "megatrends" hover in the background, including population growth, ageing populations, urbanisation, energy security, wealth inequality, food security and the decline of ecosystems and biodiversity. Important issues in themselves, they also act in combination with each other to add a layer of complexity to the challenges that companies and shareholders have to deal with.

But this complexity should not be an excuse to ignore these issues – businesses and investors need to understand this landscape and be able to navigate it if they are to thrive in future. If investors ignore the risks, they will also miss out on the opportunities – which are considerable. Bloomberg New Energy Finance recently announced that it has tracked $1 trillion in clean energy investment since it started in 2004. The second trillion is likely to come about much more quickly than the first.

That investors are starting to understand this is evident from the number of investors signed up to initiatives such as the United Nations' Principles for Responsible Investing, the Carbon Disclosure Project and the Institutional Investors' Group on Climate Change

It is also reflected in the fact that all the information companies such as Reuters, Bloomberg and MSCI have bought up ESG analysts and are now incorporating this information into the services that they provide for investors. As Curtis Ravenel, global head of sustainability initiatives at Bloomberg, says: "As a financial information company trying to deliver value to its clients, we have realised that extending the notion of capital beyond financial to human and environmental is becoming increasingly important."

And a body of evidence is emerging that businesses that deal best with sustainability issues outperform their peers financially. The top 100 companies in Newsweek's Green Rankings in 2009, for example, outperformed the S&P500 by 4.8%, according to this article by Cary Krosinksy of environmental analysts Trucost while the Carbon Disclosure Project revealed that  "companies with a strategic focus on climate change provided investors with approximately double the average total return of the Global 500 from January 2005 to May 2011".

ESG issues matter to investors – not just for their own sake but because they have an important bearing on how their portfolios will perform in future – and that is why we will be shedding light on them in the months to come.

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