There is a balance being struck; a demonstrable conflict between long-term and short-term value. Chaos and the reign of volatility in the markets are exacerbating this conflict and giving rise to perception and a solution based on values, which may be our way out of the crisis. The value inherent in the markets - and thus the economy - is derived from society: the sustainability of society and a sustainable society.
Sustainability traditionally is seen as an adverb, or a word that enhances a person, place, or thing. But I would posit that this is no longer the case. The very notion of sustainability is bound up in our actions as well as our circumstances - what we do and who we are – which are often beyond our personal ecosystem.
Sustainability, a word that is increasingly bandied about, particularly with the uptake of the UN Sustainable Development Goals (SDGs) and the growing awareness of their ambitions, can be seen as both a noun and a verb. As a noun, ‘sustainable’ refers to the capacity of being sustained or continued with minimal long-term effect on the environment. The noun is reflective of our current state where we’re faced with the real prospect of our society and environment not being sustained.
Sustainability as a verb means action and activities needed to ensure the delivery of the SDGs. In principle, it means what we do in the drive to sustain our way of life and our ability to live on the planet to give all a good quality of life. Sustainability is not a drive toward equality, but toward the sustaining of our shared lives in this environment.
While sustainability as a noun is more often coupled with ‘development’ or ‘agriculture’, sustainability as a verb signifies ‘behaviour,’ in terms of corporate behaviour.
Why all this discussion around the use of a word, which most engaged persons would understand? Because semantics counts when encouraging real alignment and informing business and investment strategies – the drive toward action and enhancement of our current status. The theme of sustainability is usually captured under environmental, social and governance criteria (ESG). Long-term growth is in everyone’s best interests and investing in that long-term growth is currently out-performing recognised ‘non-ESG’ markets. HSBC’s Ashim Paun[1] has published a paper which demonstrates how strong environmental values are currently outperforming the wider stock market. Indeed, ESG factors are succeeding in bringing long-term value to shareholders, employees, customers, supply chains, the environment and the wider society. In a nutshell, companies which pursue a clear ESG business strategy provide investors with a good understanding of how they and their sectors are exposed to the crisis and therefore how they can weather short-term shocks.
After being in this field for nearly 30 years, investment is now at the point of understanding the real alignment between sustainable finance, responsible business practices, and returns. Trusted sustainability information offers quite a few data points with which the perspicacious investor can identify holistic risk management and risk resilience. In fact, there is empirical evidence which illustrates the link between the strong ESG performance of a listed asset and its financial performance. However, not everything is positive for ESG factors: the COVID-19 crisis is also supplying some real-world headaches.[2] But setting those challenges aside, the moment when ESG strategy becomes a key part of good ‘investment’ strategy has finally arrived.
Although COVID-19 is sucking all of the oxygen out of the air, there are implications that this global crisis has some real-world impacts on business activity, investment strategy, and new products (business and investment). There are products, both financial and business, that are being developed to bring value to the following parties: investors, suppliers, customers, the environment, employees, and society. The buzz is building that good environmental and social stewardship should demand a market premium and reduce the price of capital. New developments in the origination of debt instruments and equity market activities are proving this. The take-away message is that a purpose led strategic model is leading to the future fitness of a company, which in turn positions the company to deliver financial, environmental and social returns.
Some of the more notable ESG or sustainable financial products include indexes and debt instruments. Increasingly sophisticated indexes continue to be developed based on sustainability and ESG factors, which deliver verifiable returns and real impact. If trusted and transparent sustainable ESG data can be procured, this will transform the passive investment management landscape. Indexes are finding increasingly clever ways to create products which serve both shareholders, investors and society by championing a more thematic approach. The bond market has truly taken off: no longer is it ‘exotic’ to originate a bond that has a social or environmental component of the yield.
To reiterate, my message is that the semantics of sustainability should not be limited to being just an ‘enhancer’ as it is a pro-active way forward for businesses and investors and also helps to define what these actors do. Sustainability is seen as ESG in the investment world, which during these times of crisis is a good proxy for the resilience of the investment community. But sustainability as an overarching issue of ESG delivers returns to shareholders by creating value for all stakeholders. The current crisis, COVID-19, has created a situation in which sustainability and ESG is a good defence against the social and environmental impact of the crisis on businesses and investors.