Sustainability is a key driver of transformation for businesses as organizations understand the risks associated with a changing environment, according to investment and risk managers interviewed by Digital Nation Australia.

As shareholders demand that companies engage in environmental, social and governance (ESG) practices and investor money flows into responsible investment portfolios, companies are learning that sustainability is no longer an issue. check box exercise.

According to Mary Delahunty, head of impact at HESTA industrial super fund, companies are transforming rapidly as they begin to understand both the business risks associated with climate change, as well as the opportunities that exist to embed sustainability into the business. basic business strategy.

What is sustainability?

While the concept of sustainability hasn’t always referred to the environment, it has always been used to describe long-term performance.

“We use this term sustainability, but we use it quite broadly,†says Delahunty.

“Before we knew about climate change, did that mean it had long-term resistance? And that still means that at some level, but what we now associate sustainability with is understanding whether this business and the business practices or areas they are expanding into to respond to a changing climate, and can help us to stop this particular trend.

For companies concerned with delivering long-term value to stakeholders, Delahunty says sustainability enables this in a world in transition.

“Sustainability is a good bet, really, in a business because it is a testament to how capable it is to adapt and change in a world that we anticipate entering our investment horizon. “

According to Desiree Lucchese, head of ethics and impact at ethical investment fund U Ethical, sustainability has traditionally represented incremental improvements in efficiency for things like materials management and packaging. Today, she says, sustainability has a much broader purpose.

“What is now sustainable really reaches a much larger framework, which maintains our investments in a climate safe and socially just world,†said Lucchese.

This inherently long-term perspective can be an engine of growth and business performance as well as an engine of value creation for businesses.

According to Victoria Whitaker, risk consulting partner at Deloitte, sustainability can drive value creation through multiple lenses.

“I think sustainability, when thought through deeply by organizations, is really an opportunity to create value by having a broader perspective and a broader understanding of the relationship your business has with society and society. ‘environment,’ says Whitaker.

Whitaker names operational efficiency, risk management – both physical and reputational – attracting and retaining talent, as well as innovation as the primary ways in which sustainability drives value creation for businesses .

“When you start to think through these lenses, you have the opportunity to think of ways to develop products differently, to access markets differently, to look at different types of business models to help generate capital, and we I’m starting to see that come to fruition.

Responsible investment

The United Nations Principles for Responsible Investment identify customer demand, materiality and regulation as engines of growth in the responsible investment market.

According to Lucchese, “We have not seen an earthquake, but a change of times in ESG and green strategies and ESG ETFs. So we saw a significant flow of capital to new products.

Lucchese says that since May of this year, global bank lending to companies with an ESG focus has increased 292%, with $ 52 billion allocated in that space.

“This tells us that we are ready as a company and as investors to invest in the transition we need to continue to deliver social and environmental results, because the world is changing rapidly and we have to adapt to it,” she says.

“We’re starting to realize that this is risk mitigation, that there is a link to good performance over time, and that it is just a smart business, allowing your holding companies or your credit recipients to really transition their activities to reduce… risk exposure and ensure a long life. long-term sustainability of their operations.

According to Whitaker, the dominant number of questions asked by shareholders at annual general meetings refer to issues related to climate change, diversity and inclusion. Executives are forced to answer these questions from their investors and be transparent about their position on these issues.

“[Companies] respond to their investors when they ask questions about these issues, consider how they can be more transparent about these things or if they are as aware as they need to be to keep that investment in the issues they are facing in. So I just see it getting bigger and bigger in the future. And it’s not just in investing either. It’s also in providing capital, â€says Whitaker.

Active property

Delahunty describes the action of shareholders at general meetings as “really sharp†and explains how active ownership can reduce this acuteness.

“Active share ownership, I think, needs to come out from behind the curtain behind which it has been conducted for far too long, in order to give fund members the transparency to understand what funds are asking their companies, but also to make sure. that we are lifting the system, â€says Delahunty.

By actively engaging with companies and asking questions on behalf of members to gain a deep understanding of their sustainability commitments, actions and goals, Delahunty argues that greater transparency can be provided to shareholders, while generating a real transformation.

“If you really want to change a system, you’re not just doing it business by business, you can do an example with a business, but actually to make changes to make real genuine changes to the whole business. a system, we kind of need to be a little more transparent in our active shareholding activities.

Enterprise PPA

One method of enabling companies to meet their sustainability commitments and reduce their carbon emissions is through the use of corporate power purchase agreements (PPAs).

According to Aylin Cunsolo, energy and resources partner at Baker McKenzie, entering into a PPA has a number of benefits for companies, the two main ones being sustainability outcomes and economic benefits.

“[A PPA] can enable a company to meet its sustainability goals to reduce emissions associated with electricity consumption, â€explains Cunsolo.

Traditional PPAs include the direct supply of renewable energy. But there are other synthetic types of PPAs, Cunsolo says, that act as a financial instrument or a hedge. She sees both methods as effective instruments for companies to improve their sustainable business practices.

“By entering into a PPA with a wind or solar farm, it allows that wind or solar farm to be financed, and therefore built, because it provides certainty of fixed income, over a long period of time. Thus, the company can be seen as supporting new renewable energy projects and thus effectively reducing emissions associated with electricity in the grid.

Sustainability KPI

For companies that have made sustainability part of their strategic goals, key performance indicators can ensure leadership accountability.

According to Whitaker, “For most organizations, they definitely have KPIs around risk management, so if sustainability is listed as a separate element would only be, I think, in companies where sustainability is a deep part of. their strategy, that we would see that.

While not all companies classify sustainability this way, she says leaders are increasingly expected to uphold an organization’s purpose and values, with sustainability often being a contributor.

“I think companies, given their higher power status in society, are sort of bigger individuals. “says Whitaker.

It’s not just a moral obligation, however. Whitaker cautions that companies that fail to consider the sustainability risks of their businesses at the moment will struggle as regulations tighten.

“There are companies for whom if they do not act in the next three to five years on climate change issues, probably even less than that, they will not exist as a company in the future. The threat of climate change is such that if they don’t address it they won’t necessarily be physically affected, but the level of regulation that comes into play means the risk of transition … becomes so high that they won’t. Actually. have a role to play in the future.