Wealth Management

SUSTAINABLE BUSINESS: REACHING THE TIPPING POINT

By
Adrian Howard
on
December 14, 2021

Major fossil-fuel companies are beginning to shift towards more sustainable strategies as a result of shareholder activism. As investors, customers and employees demand action on climate change, we are reaching a tipping point and those companies that are slow to adapt will lose their competitive edge. By investing in companies that are committed to sustainability, you can help shape a better world.

Recent shareholder actions against major oil companies represent a watershed moment in global attempts to tackle climate change, according to a leading sustainable-business speaker and author.

In recent months, oil producers Chevron, ExxonMobil and Shell all lost major battles against shareholders, forcing them to adapt more sustainable, climate-friendly strategies.

Marga Hoek, author of The Trillion Dollar Shift, claims such huge fossil-fuel companies being pushed towards a new sustainable model by activist shareholders is a huge moment and shows we are at a tipping point. They pave the way for such actions to become common in the future, she says.

“It happened because companies with products that harm the environment face many steepening challenges, forcing them to transform rapidly,” says Hoek. “It’s no longer ‘if’ they need to change but ‘when’, and investors realised this before those companies’ leaders did.

“If your company relies on fossil fuel, that finite resource will become increasingly scarce and expensive, squeezing your profits. Legislation is shifting demand away from your product – for example, laws that move car production away from petrol and diesel cars towards electric. Your competitors, such as renewable-energy providers, will become cheaper as they scale up. So you will lose competitive position.”

Yet another risk is negative publicity if new legislation forces you to reveal non-environmentally friendly practices in your company. Having to disclose a bad climate footprint will damage reputations quickly, and large companies cannot afford such bad publicity, says Hoek.

Investors are increasingly concerned about how these risks will affect companies that are not transforming rapidly, which is why some took the initiative and forced the companies into swifter action this year.

Opportunities in sustainability

Hoek notes that sustainable business models could open economic and employment opportunities.

“There are lots of huge business opportunities from engaging with sustainable-development goals – from cooling cities to solutions for mobility, waste reduction, health and carbon-free food production,” she says. “Plus, there are short-term efficiency gains, which help move them in the right direction.

“Furthermore, new generations of customers and employees are demanding measures on climate change and more sustainable products. So if you deliver that to them, that will give you competitive edge.”

This is why an increasing body of evidence is showing that investments in sustainable companies have out-performed non-sustainable ones. Indeed, the more sustainable the investment, the better it performs, says Hoek.

Addressing poor progress

Hoek says investors have had to take radical action because the progress of many companies in responding to these risks and opportunities has been too slow.

The latest Intergovernmental Panel on Climate Change (IPCC) report shows countries are far from meeting the goals set by the Paris Agreement on limiting global warming to below two degrees (1). Instead, climate change is widespread and intensifying. Investors are realising we need radical change to make up for lost time.

“Investors need to work harder too – every company and every investment needs to at least align with the Paris Agreement,” says Hoek. “If the funds you invest in live up to Paris, that means the companies they invest in have to as well.

“Business is the most powerful force in the world, and we can’t wait for politicians to catch up. Companies and their investors need to take on the responsibility.”

Leading examples

Not every company has to be pushed by investors. Some have shown great leadership in addressing climate change. An example is power company Ørsted, which chose to phase out all fossil energy and is in the final stages of their renewable transition.

“A clear, courageous choice and objective such as Ørsted’s brings so much motivation and power in your company,” says Hoek. “Having become nearly net zero for carbon emissions, Ørsted has now set the same goal for its entire supply chain by 2040. That’s the kind of leadership we want.”

Another example is health, nutrition and bioscience company DSM, which moved its focus away from products, such as coal and bulk chemicals, to become more purpose-driven.

“Its purpose is now to be ‘net positive’, a phrase we hear increasingly,” says Hoek. “It means investing only in initiatives that will have a net positive impact for people, planet and preferably both. Instead of focusing on products, DSM found that the most important thing it had to offer was the power of science, which it could use to improve climate-related energy and resources projects. If you make your purpose that clear, it can make your company very adaptive and innovative. By leading with its competencies, it found all kinds of solutions.”

Stakeholder model for business

Hoek says the current tipping point is leading to the rise of a new ‘stakeholder capitalism’ model, in which activists pressure companies to create value for all stakeholders – not just shareholders, but customers, employees, suppliers, communities and the environment. But this works financially too, because this model will make your strategy naturally sustainable, she says.

“It doesn’t need a change in the legal structure of companies, but we do need more modern governance laws and disclosure rules that force companies to be multi-stakeholder,” says Hoek. “We also need a tax system that incentivises value to all stakeholders and a move towards the circular-economy model, in which companies are rewarded for recycling natural resources. Shifting towards a circular economy is a huge, multi-million business opportunity. For example, housing can become a service, which makes the original owner responsible for building it in a recyclable and sustainable way.”

So how should investors respond to this watershed? Hoek’s advice is simple: “Don't ignore the fact that eventually, non-sustainable firms will go out of business. Take responsibility to invest in our future.”

Sources:

1 Climate change 2021: the physical science basis, Intergovernmental Panel on Climate Change, August 2021