Today's theme - how investors think about sustainability
and its probably different from what you think
As someone who spent nearly 30 years in the financial industry, the main reason I started writing these blogs was because I could see that a lot of the work being done in sustainability and ESG was, to put it nicely, falling on stony ground. This doesn’t mean that there hasn’t been a lot of good work done, and that we haven’t made some progress - its just it’s not enough.
What do I mean by that ? Many of the changes we need as a society require action by financial people. Finance is not everything, but if the transitions are to happen on the ground, then we need financial people to act. As we frequently read - just to deliver net zero, we need to invest $4-5 trillion every year out to 2030. This is over double what we invest now. On top of this we also need to invest to preserve and rehabilitate our environment, social systems and biodiversity. And we all know that we are well short on all measures.
So, why is this investment not happening? I suggest its because we are starting from the wrong place. We need to make the message more compelling financially.
If we wanted to sell people a product or a service, we would spend a lot of time identifying our target market, understanding how they think, what levers we can pull and how we might persuade them to buy what we sell. Why they would choose our product over the others.
A good example is Apple. As Simon Sinek says in his now famous Ted Talk, they are “just a computer company”, so how have they been so successful. He argues that its because they start with WHY. Emotionally why should a consumer want to buy an Apple product?
Simon Sinek: How great leaders inspire action | TED Talk
In our case the process should start with “why should financial people care about sustainability and ESG”. And this is not why do they not think and act like us. Its how do I communicate with them in a way that that answers the WHY question for them - so from their perspective, not from ours.
Finance people by & large start from the question of “how can my business or project earn a fair financial return”.
This question is not as simple as it sounds. At its core its asking “does my product or service meet a need in society, and are my consumers willing to pay for me to meet this need, and pay enough that I cover my costs and earn a financial return for my investors”. And tied up in this is the long term, because most of the value in a project or company comes from the future, from the period five years or more away. The short term is just noise.
We could discuss all day (& I frequently do) what this means in practice. And why earning a fair financial return is important. But for now let’s explore what this means for how we communicate sustainability and ESG.
I suggest it means three things.
First - be clear about which problems we think the financial world can solve, and which ones they cannot.
And then we have fear & greed.
First fear. Make sure the financial risks are real. Pressure politicians, regulators and our wider society to do things that make it clear to financial people that the future financial costs of “business as usual” are so high that they need to start acting now to create business models that will survive in the new transition world.
And real means real. For instance, I suggest that one reason why many investors are still involved with Oil and Gas is that they don’t believe governments are really committed to rapid change. They see us (collectively) saying one thing but doing another. And so they think that investing in Oil & Gas will continue to make a profit, way out into the future. We need to make the “stick” realistic.
And then greed. We need to be be clear about the financial incentives that exist to push the financial world in the “right” direction. This is not all about subsidies, although they have a role to play. The sustainability transitions are going to create some really exciting new investment opportunities, in green energy, in electric vehicles, in new ways of producing food and in new ways of building, heating and cooling our homes and offices. These are the “carrots”. If we structure them right, the finance people will be drawn by the opportunities.
I accept this is a massive issue, and that today we can only scratch the surface of the debate. But we need to start, and we need to debate. Because if we don’t we fail.
To progress this some more, in Notes I will share three important pieces of work.
The first is from Alison Taylor (in her own words - “Clinical Professor at NYU Stern School of Business, Executive Director at Ethical Systems, lots of other hats, even more opinions. Writing a book for HBR Press on how business can do the right thing in a turbulent world”). She recently did a really good presentation, on among other things the limits of what we can expect finance and sustainability professionals in companies to actually deliver.
Next up is Alex Edmans, London Business School academic and author of Grow the Pie. His message is mostly about the opportunity. But this is not about “invest in this because its going to be big”. He talks about real value creation - which he thinks of as “making the pie” bigger, rather than arguing about how much of the present pie we can grab, which usually means taking from others. His book is great.
And finally for today we have Rebecca Henderson, a Professor at Harvard, a research fellow at the National Bureau of Economic Research and a fellow of both the British Academy and of the American Academy of Arts and Sciences. Again in her own words “my research explores the degree to which the private sector can play a major role in building a more sustainable economy”. Much of what she writes about is focused on the good stuff, the opportunities, but for today I want to highlight her thoughts on the risks, and what we can do to make them feel very real for financial people. She is also an author, including a really influence book called Reimaging Capitalism in a World on Fire. Rebecca’s book is also great.
What is “today’s theme” - its where we look at a theme we have written about in detail before and highlight some recent news, and what it means. Most of the links in this blog are to articles we have written on this topic before. And to be clear, we are not trying to sell you anything, we don’t promote investment funds and we don’t work for industry groups. We just happen to think that if you are better informed, you stand a good chance of being able to make a real difference. If we think an aspect of sustainability is not currently financeable - we will tell you.