Sustainable investing: The new norm

Not so long ago, only a niche set of socially conscious investors were financing companies based on factors relating to sustainability or climate change. But today, climate change is a growing area of interest for many investors—including mainstream investors. At the same time more businesses are facing increased pressure to communicate their long-term strategic value in a carbon-constrained world.

The Wall Street Journal recently reported that fund managers worldwide are investing more in companies that address the effects of climate change. A leading data provider tells WSJ that funds using environmental, social and governance (ESG) factors in their investment strategy were worth a collective $485 billion as of April—more than four times their value in 2014.

It’s not just socially responsibly investors who are investing in environmentally-conscious companies. A recent survey of nearly 500 global institutional investors found that 80 percent have an ESG component to their investment strategy. These aren’t “activist” investors who are pushing climate change agendas or investors willing to accept lower returns on “virtuous” investments. Rather, two-thirds of the fund managers surveyed said their ESG strategy generates higher returns. Companies that are good at managing complex risks such as climate change are being seen not only as good stewards of the environment, but as financially responsible and profitable.

Shareholders are also taking a more active role in engaging with companies on ESG issues, and climate change in particular. A 2018 report from Proxy Preview shows the number of ESG-focused resolutions filed and voted on has risen by nearly 50 percent over the past six years. Not only that—climate change was the No. 1 topic among the resolutions filed.

The markets, themselves, are taking notice that investors are looking for companies that that operate with a long-term mindset. Just last month, the U.S. Securities and Exchange Commission approved the Long-Term Stock Exchange, which calls itself “the only U.S. stock exchange designed from the ground up with a vision to help companies create lasting businesses and empower long term-focused investors.”

One key way for companies to signal that they’re serious about addressing climate change is to disclose climate-related risks and opportunities to investors. Voluntary initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD) are providing tools to help companies highlight their long-term strategies as we move toward a lower carbon society. Launched at COP21 in Paris, the TCFD developed a voluntary framework for disclosure that includes a focus on disclosing climate-related factors on governance, strategy, and risk management, as well as on establishing and reporting regularly on climate-related metrics and targets.

C2ES has been actively engaging with members of our business council to help them with implementing TCFD’s recommendations – including best practices in conducting 2-degree scenarios analysis and legal considerations around disclosure.

Many shareholder proposals are now suggesting actions in line with the TCFD’s recommendations. In some cases, TCFD reporting is becoming mandatory. European goverments are acting swiftly – Article 6 of the French Energy Transition Law was adopted in 2015 and mandates carbon disclosure reporting for publicly listed companies. The European Commission’s non-financial reporting directive (2014/95/EU) also requires additional transparency from large corporations, and its guidelines incorporate recommendations made by TCFD.

U.S. government regulators are also looking at the TCFD guidelines more closely. Two weeks ago, financial regulators at the U.S. Commodity Futures Trading Commission established a new subcommittee to address climate-related financial market risks at a meeting where C2ES provided testimony on corporate actions related to the TCFD’s recommendations.

In light of these changing dynamics in financial markets, companies are working to attract investors—those who see smart environmental management and profitability going hand in hand. To do so, they are communicating to their stakeholders about how they are staying ahead of the climate risk curve—such as mitigating regulatory risks or managing changes to their business portfolios.

Companies are also exploring ways of enhancing their profitability by finding new growth prospects. This could mean finding new investment opportunities related to emerging technologies or developing new business models. A recent report from the United Nations Business & Sustainable Development Commission highlighted that aligning business strategies with the UN Sustainable Development Goals could open up $12 trillion in market opportunities.

Focusing on an opportunity-driven model for coping with the climate crisis is a growing trend for more companies to highlight how their business strategies are driving shareholder value over the long term in a sustainable way. As more companies and investors come to that realization, that’s good for both the economy and the Earth.