Corporate Sustainability: The Climate is Changing

Private enterprise is often lauded for the speed at which it recognizes and addresses society’s needs. However, the seeming failure of the business community to recognize and respond to the climate crisis and other mounting sustainability challenges has caused some to question whether business will play a positive role in addressing environmental challenges. Below, we discuss recent trends in consumer behavior, regulation and investment markets that appear to be pushing business to operate more sustainably.

Consumers: Sustainability Pushes the Right Buttons

In recent years, corporate sustainability has become more important to consumers at large. According to The Conference Board^® Global Consumer Confidence Survey, a strong majority of consumers agree that it is ‘extremely important’ or ‘very important’ that companies implement programs to improve the environment.

This focus of consumers extends beyond company activities to the characteristics of the products they buy. Further, survey data suggest many households not only find sustainability characteristics of products important when choosing what to buy, but also have a willingness to pay a premium for attractive sustainability characteristics. For example, Nielsen research shows that 47% of households find “Recycled Packaging” to be an important attribute, and 30% of households say they would pay more for that attribute.

As evidenced by the Conference Board® survey, younger generations such as Millennials are more likely to bring their environmentalism to their relationships with corporations. In general, Millennial attitudes towards corporations also have been characterized as being more cynical than those of previous generations. They want to understand the source of their products and food as well as the environmental and social impacts of the companies they patronize, and as a result, they demand more transparency from their companies. As Millennials move into their prime earning and spending years, their preferences are increasingly influencing corporate strategic decision making.

Regulators/Policymakers: Broad, Coordinated Steps Globally

Globally, there is a strong consensus on the seriousness of the climate crisis, which has resulted in broad and increasingly coordinated activity to address emissions around the globe. This is most strongly evidenced by 2015’s Paris Agreement, where 195 countries from around the world agreed to individually determine their contributions towards efforts to limit the effects of greenhouse gas emissions on the climate and to report on progress towards their goals. Evidence of a broad and meaningful focus on climate action includes the European Union’s Emissions Trading Scheme as well as the fact that over 40 countries now have some form of mandatory greenhouse gas reporting scheme. Individual country efforts to ad- dress the environment have also been strong, with China’s efforts noteworthy for their breadth, intensity and impact.

In the US, action from regulators and policymakers has been mixed. At the federal level, the Trump administration has sought to reduce environmental regulation, while highly aggressive plans presented in the House to address climate change (such as the “Green New Deal”) have not found traction across the aisle or in the Republican-controlled Senate. However, at the state level, there continues to be movement towards greener policies. The Eastern states involved in the Regional Greenhouse Gas Initiative, a cap and trade program for electric utilities begun in 2005, currently are seeking to follow California’s example by working to expand their program to transportation. Nearly 30 states continue to employ and to evolve their renewable power standards, which govern the ways in which state-regulated utilities have to source the energy provided to residents of the state. Property Assessed Clean Energy programs, where property owners can finance resource efficiency improvements via long-term loans, are now offered for commercial property owners in 35 states.

Investors: Demanding Better Sustainability Information and Performance

Growth in investor interest in corporate sustainability and companies’ environmental, social and governance (ESG) characteristics has been exceptionally strong in the past several years. This growth in interest has come in part from the recognition by investors that companies’ sustainability performance has a material impact on the companies’ financial and stock price performance. These findings were highlighted by a 2016 Deutsche Bank meta-analysis of over 2000 studies where nearly 57% of the studies evaluated showed a positive relationship between corporate sustainability efforts and financial performance.

Evidence of the materiality of sustain- ability factors has led most of the world’s most prominent asset owners and investment firms to affirm their commitment to evaluating sustainability factors in their investment decision making. The most visible sign of this commitment is the immense popularity of the Principles for Responsible Investments. Today, there are over 2300 signatories to the Principles representing nearly $90 trillion in investment assets, with the signatories including such household names as Blackrock, Vanguard and Fidelity. Notably, signatories pledge to seek increased transparency and disclosure from investee companies on their ESG characteristics and to engage investees on ESG issues.

A rise in shareholder activism generally, as well as a focus on investing for positive impact, have also been driving corporate focus on these issues. An increase in company shareholders using their access to the proxy ballot to have the company ad- dress key sustainability-related risks has highlighted company sustainability practices, often in ways that cause unflattering headlines for companies. Meanwhile, investors concerned about the impact of their investments on climate change and the environment are not only avoiding companies with poor track records, but increasingly seeking investments focused squarely on improving the environment, such as green bonds.

Business Responses

For several years, businesses have been responding in ways both small and large to the increasing pressure to become more sustainable. Seemingly every company is undertaking meaningful sustainability initiatives, with common activities including:

• Diversifying or strengthening supply chains to avoid potential disruptions from climate change
• Reformulating products to use more natural and organic ingredients
• Reducing waste or plastic use in packaging
• Introducing new products with greener characteristics

A quick look at the sustainability re- ports of major corporations shows how far-reaching and integral to companies’ overall business strategies are their sustainability efforts. For example, Kraft Heinz has set a goal of making 100% of their packaging recyclable, reusable or compostable by 2025, while also working to reduce greenhouse gas emissions, energy use, water use and solid waste by 15% each from 2015 to 2020. In the words of Alan Jope, CEO of Unilever:

More and more of our brands will become explicit about the positive social and environmental impact they have. This is entirely aligned to the instincts of our people and to the expectations of our consumers. It is not about putting purpose ahead of profits, it is purpose that drives profits.

Shareholder interest is not only adding increased pressure to operate more sustainably, it is also driving an increase in transparency and reporting on those efforts. Today, approximately 78% of companies in the S&P 500 and 93% of the Global 250 offer dedicated sustainability reporting. In a virtuous cycle, this increased dialogue and transparency is leading to more meaningful activities and a heightened expectation for the efficacy of sustainability efforts.

The recognition of the importance of regulatory clarity on sustainability concerns has also led to a recent and somewhat surprising phenomenon of explicit widespread corporate sup- port for a price on carbon. In May 2019, two unrelated groups, including the CEO Climate Dialogue and another group convened by the environmental advocacy group Ceres, loudly called upon US legislators for regulatory action on climate including a price on carbon. These groups included many of the world’s largest corporations from a variety of sectors, including BP, Unilever, Dow, Microsoft, and Starbucks.

While evidence that corporations are increasingly taking action on sustainability has been unequivocal, it has been unclear the extent to which these efforts simply reflect isolated actions taken in response to specific dynamics affecting individual companies, or if these efforts are representative of a broader change in business’ orientation towards sustainability as a whole. From this perspective, an Au- gust 19 announcement from the Business Roundtable, a business advocacy group comprising CEOs from nearly 200 of the US and the world’s largest corporations, is noteworthy. In this announcement, the Roundtable revised their statement of the purpose of a corporation to move from a theory of shareholder primacy to a theory of stakeholder value creation. Under this framework, the focus of corporations moves from generating shareholder profits above the needs of other interested par- ties such as employees or suppliers to the creation of “shared value”, where multiple stakeholders benefit from a corporation’s activities. While achieving shareholder profit remains a primary goal, other goals, such as fostering employment and creating healthy, sustainable communities, also are deemed as valid and important goals.

Altogether, it is clear that corporations are beginning to do more than just pay lip service to sustainability. In large part, corporations are responding rationally to the risks and opportunities presented by sustainability. They may very well be acting as much out of self-preservation as a sense of corporate citizenship. However, regardless of the reasons they are moving, their very real movement towards a more sustainable economy is encouraging.