Question

What is the added value of companies from adopting sustainable investment?

Answer 1

Sustainable investing is about investing in progress, and recognizing that companies solving the world’s biggest challenges can be best positioned to grow. It is about pioneering better ways of doing business, and creating the momentum to encourage more and more people to opt in to the future we’re working to create.

Through the combination of traditional investment approaches with environmental, social and governance (ESG) insights, investors ranging from global institutions to individuals are taking a sustainable approach to pursuing their investment goals.

Leaders from 193 nations converged on New York last week for the UN General Assembly and adopted the sustainable development goals, which are not short on ambition. Beginning with a goal to “end poverty in all its forms everywhere,” they cover gender equality, food security, peace, health, clean water and sanitation, sustainable cities, among others. While the scope is impressive, the problem is that governments have already reneged on earlier commitments to the goals’ predecessors. With the even heftier price tag for achieving the goals — $2 trillion-3 trillion a year for 15 years, or 4 percent of world GDP — there is a real need for innovative alternatives to close the gaps. This is where the private sector can help close some gaps.

Why, you might ask, should the private sector — with shareholder returns to worry about — get involved in lofty U.N. initiatives? First, the private sector contributes 60 percent of global GDP and 90 percent of the jobs, and may be better positioned to accomplish many of the goals because of better reach and resources. Second, if achieving some of the goals also helps achieve shareholder interests, the U.N. summit could result in a fresh burst of innovation and creative finance.

We conducted research at Tufts’ Fletcher School, funded by Citi Foundation, to understand why companies would even consider investing in sustainable development. we found four motivating factors:

1. Mitigating business risk from potential disruption of operations, supplies or reputational damage.

2. Adhering to industry norms of transparency, traceability, environmental responsibility and other accepted standards.

3. Winning share in current markets and establishing a beachhead with future customers.

4. Building goodwill with key stakeholders.

These issues gain even more currency in the developing world, where much of the future market growth resides. Consider the example of Coca-Cola, with 75 percent of operating income from overseas and a heavy reliance on emerging markets. Also, Coke, as a heavy user of both water and plastics, has a giant environmental footprint, which, arguably, is unsustainable. It is not surprising, therefore, that Coke is an active participant in innovating in sustainable development. It shares its logistics capabilities to distribute medicines and supplies to remote African communities. Its Beyond Water partnership with the World Wildlife Fund works to maintain resilient freshwater systems in 50 countries. Its Project Nurture partnership helps farmers in its supply chain identify new opportunities and improve productivity. It has developed the first-ever recyclable plastic bottle, with plans to make the practice universal by 2020.

In other words, there is a plausible business case to be made to invest and innovate in sustainable development — and Coke is no outlier. Sometimes, the case is easier to explain. The brewer, SABMiller, switched its feedstock from expensive European imports to sorghum, a popular staple crop in arid regions in Africa. This helped cut cost and transportation time to African consumers, and promoted local farming communities, creating new generations of consumers — and sorghum beer was a hit.

In other situations, the business case is less obvious, if not downright counter-intuitive. Patagonia the apparel maker, launched an advertising campaign around Thanksgiving 2011, “Don’t buy this jacket” to focus on repairing, reusing and recycling. While the campaign may have had its roots in the company founder’s environmental responsibility mission, it attracted new consumers. Annual sales in the following two years grew almost 40 percent.

Establishing the business case, allocating resources and executing on activities that also help achieve the goals is indeed an innovation opportunity. How different is this form of innovation from “traditional” innovation? There are many similarities. Both demand near-term investment and uncertain payoffs over the longer term. Both experience a similar set of organizational obstacles.