Embedding sustainability priorities: ‘It’s not personal — it’s strictly business’

THERE has been a groundswell of sustainability and Environmental-Social-Governance (ESG) actions in the past decade. The main driver is an increased focus on stakeholder capitalism, whereby companies are responsible for the interests of all stakeholders — shareholders, employees, customers, partners, community and the environment.

Companies that exemplify sustainability priorities tend to have higher market valuations. A WTW research paper on Sustainable Investment in 2018 looked at various studies between 2014 and 2017, and concluded that higher ESG scoring companies tend to provide moderately better risk-adjusted returns over the long term. Companies focused on renewable energy, for instance, see higher valuations for their share prices driven by the pension funds’ sustainable investments mandates.

The Singapore budget 2022 also announced a carbon-charge (cost associated with emitting each ton of carbon dioxide) that will progressively increase till 2030. Companies thus have both the “carrot” (lower interest rates) and the “stick” (higher carbon charges) to align their cost of capital with sustainability targets.

Boards of some oil and gas majors have been sued or replaced for failing to prepare their companies for net-zero. But in a recent twist, investors criticised the board of Unilever for “displaying sustainability credentials” at the expense of focusing on the fundamentals of the business. Similarly, the CEO of Danone was ousted for pegging the group’s success directly to its environmental performance.

As the famous line in the film The Godfather goes: “It’s not personal — it’s strictly business” Directors would do well to realise that embedding sustainability priorities makes good business sense.