Five Trends That Will Shape The Sustainability Agenda in 2017
After a year full of surprises, many of us working in sustainability and corporate social responsibility (CSR) are looking into the future with trepidation. With an incoming administration that campaigned on easing environmental regulations and dismissing climate change, the worry now is that key policies that encourage sustainable business practices will be reversed — or worse.
So is it time for sustainability professionals to hunker down, close the hatches, and wait out the storm? I don’t believe so.
For one, sustainability has matured to the point where it has moved from a nice-to-have into the heart of corporate strategy and risk management. More and more corporate leaders and investors are coming around to view sustainability initiatives as activities that drive innovation, protect value, and foster growth, and are dropping the notion of CSR as corporate philanthropy.
Another reason is that sustainability has a global dimension. Large corporations operate in many jurisdictions, and while regulatory pressure may ease in one country, rules designed to protect the environment and the society will continue to impose a legal risk on operations in other countries. Key social, demographic, environmental, and economic trends that drive regulatory change and corporate sustainability practice are not subject to election cycles, and will continue to shape operations in a global economy.
With this in mind, here are five trends that will remain on top of the sustainability agenda in 2017:
- Renewable Energy
- Transparent Supply Chains and Responsible Sourcing
- Social License to Operate and Stakeholder Engagement
- Sustainable Finance
- Sustainability Data
Major corporate power consumers have come to the conclusion that procuring renewable energy provides considerable upside potential for their business. At the same time, there is a movement in corporate renewable energy procurement away from voluntary renewable energy credit (REC) purchases and towards power purchase agreements (PPA). With PPAs requiring term lengths of 10–25 years, this is a clear indication of a long-term commitment to renewable energy.
This trend is driven by a combination of cost management, predictable costs, and resiliency considerations. Wind and solar prices have come down significantly over the last years, and are now competitive and in some markets even cheaper than coal or natural gas. In addition, renewable PPAs protect corporate buyers from price volatility. In the past, prices for fossil fuels have fluctuated wildly, and the unpredictability of fuel prices raises operational risk exposure for commercial and industrial buyers. As technological innovation and scale will further decrease prices for renewable generation and energy storage, green energy technologies will continue to provide a financially attractive future for corporate power consumers.
Transparent Supply Chains and Responsible Sourcing
Supply chains in just about every major industry have become increasingly complex. Materials and labor that produce consumer staples like mobile phones or running shoes originate in frontier and emerging economies, where more often than not human rights practice is weak, environmental standards are not enforced, or where other complex social and political factors render businesses vulnerable to operational uncertainties and compromised brand reputations.
Meanwhile, a host of new regulations like the Modern Slavery Act 2015 in the UK or the California Transparency in the Supply Chain Act have joined older legislation like the US Foreign Corrupt Practices Act to incur growing reporting requirements and increased exposure to legal risk. Standards like the United Nations Guidelines on Business and Human Rights or the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas have enabled companies to develop better compliance regimes and given birth to a growing industry that specializes in on-site audits, certifications, and monitoring and due diligence. Going forward, industry leaders will refine responsible sourcing strategies, build out multi-stakeholder alliances, and explore better ways to communicate proactively with workers through their supply chains to better manage social and environmental risk at farm, mine, or factory level.
Social License to Operate and Stakeholder Engagement
Companies must secure permission to operate from not just government regulators, but from stakeholders affected by the company’s operation. A failure to secure this social license to operate can manifest in the form of protests, permit delays, or blockades. What they all have in common is that they have material impacts on a company’s finances. The Dakota Access controversy has already cost its construction company, Dallas-based Energy Transfer Partners, an estimated $100 million. In October, Canadian senior miner Goldcorp had to shut down operations at Peñasquito, the company’s largest gold mine, for almost two weeks after truck drivers, landowners and residents of a nearby community had blocked access to the mine in protest over a wide array of grievances including lack of jobs, compensation for environmental damages, and the availability of clean water.
Efficient management of stakeholder relations to secure and sustain the social license to operate will continue to be a challenge. The transfer of practices pioneered in oil, gas, and mining allows younger industries like Land-Based Wind, Utility-Scale PV and other place-based infrastructure projects to improve the conditions under which they operate. Companies will become more adept in setting up effective enterprise asset-level risk management by including community-centered feedback mechanisms that allow shortening company’s response times to grievances, and by transferring wealth back into communities through local sourcing of materials and labor.
The consideration of non-financial information like environmental, social, and governance (ESG) issues into investment decisions has been one of the fast-rising trends in finance. Today, 22 percent of assets under management in the United States have a sustainability component, and sustainable investments have outpaced the growth of traditionally managed assets since 2014. With growing evidence that ESG factors play a material role in determining risk and return of investments, integration of ESG into investment decisions is not only something that asset owners demand for ethical or other reason, but is part of the fiduciary duty of asset managers.
Acceptance and scale are the drivers of a maturing sustainable finance industry. Investors will continue to move from basic ESG strategies like negative screening towards advanced approaches like ESG integration and best-in-class screening. This move is facilitated by the increasing availability of reliable and relevant sustainability data, and by the growing experience of analysts that know how to use this data in investment decisions. Another trend is a growing demand for ESG integration into fixed-income securities. The risk-return profile in bonds is a lot more tilted towards the risk side, and ESG factors are useful in forecasting potential risks and pricing them accordingly. On the corporate finance side, investor and lender scrutiny on ESG issues will allow companies with effective and well-communicated sustainability risk management systems to reduce their weighted average cost of capital (WACC).
An increasing number of companies report on ESG performance, and sustainability accounting standard setters like the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB) now provide clear guidelines on what and how companies should disclose. Yet, self-reported sustainability data is often not externally audited, and data providers have struggled to sharpen their focus on what is most relevant to businesses and investors.
With a growing body of open data sets that collate data from governments, businesses, NGOs, and others, and the increasing availability of affordable new data streams from satellites, the Internet of Things, and human sensors, we will see a massive expansion of data that can be leveraged to measure sustainability performance. The biggest potential here is in better ways to assess the social and environmental dimensions of ESG risk, as distributed data on key issues like air pollution and soil quality, or primary factory-floor data to spot human rights issues or assess worker engagement will become more widely available. These data sets will make it possible to built new models and indices based on hyper-local, asset-level data, which in turn will allow companies and investors to supplement and audit self-reported sustainability performance data.