Written by Mark Perera, co-founder and CEO of Vizibl
The global COVID-19 pandemic has certainly created plenty of business disruption, a stock market crash as well as heightened awareness of social inequality and environmental damage. But one positive outcome from the last six months is that it appears to have pushed Environmental, Social and Governance (ESG) ratings and responsible investing up the agenda. In fact, many financial commentators in the City are saying that within five years we could be in a scenario where two thirds to 75% of investors want ESG to be prevalent in some form in the companies that they invest in.
To this point, over the past six months. ESG funds have outperformed non-ESG funds. According to a survey by Morningstar, of 745 sustainable funds in Europe 58% did better than non-sustainable funds over three, five and ten years, and there was markedly higher survivability among sustainable funds. When investors are looking for suitable opportunities, they are evaluating companies based on how sustainable they are.
ESG is moving up the investment agenda
This hasn’t always been the case, and certainly in the past decisions around where financial assets would be placed were based on other criteria, mainly financial return. However, there have always been plenty of other criteria for deciding where to place money – from political considerations to heavenly reward – and certainly sustainability has come more to the forefront in the last five years. Today, with issues such as climate change being driven by campaigners such as Extinction Rebellion, as well as other societal concerns such as #BlackLivesMatter, the opportunity to affect the wider social environment using an organisation’s capital asset has become more pronounced.
For those less familiar, ESG refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business. These criteria help to better determine the future financial performance of companies from a return and risk perspective. Therefore, whatever you might have thought in the past about ESG investing, it is clear that this is now fast becoming the norm. And if you’re in business for the long term, you really shouldn’t do anything that hampers your ability to make profits in the future, like pollute the atmosphere. This makes ESG an altogether attractive proposition for investors who have continued to invest their money into sustainable-themed funds, as it has become a more integral aspect in everybody’s investment philosophy.
Millennials care about sustainability
This is especially true for millennials, who make up a significant proportion of the workforce. For example, they currently comprise 35% of the UK and represent an astounding 50% of the global workforce. Millennials care about social issues – civil rights, racial discrimination, healthcare, education and employment are the causes millennials in this country consistently care the most about. As we have witnessed with such movements as Black Lives Matter, millennials are willing to be active about issues that affect them directly and indirectly. Therefore, it would be a mistake for providers of investment products not to appreciate how ingrained this has become.
Equally this doesn’t just apply to a company in a silo, but it also applies to the entire supply chain and every vendor within this ecosystem. If an organisation cannot demonstrate that it has a sustainable supply chain, this will also impact its brand reputation and potential for securing investment.
Likewise, the COVID-19 pandemic has clearly demonstrated the imperative for streamlining supplier ecosystems, challenging organisations to think about how collaboration, efficiency and innovation can be encouraged throughout the entire supply chain. Therefore, not only must supplier strategies now support wider business goals, but organisations must also demonstrate that they – and their supplier ecosystem – consider the ESG framework throughout every facet of their operations. In fact, this is now becoming the new benchmark by which an organisation is measured against its competitors from a shareholder perspective. This, alongside sustainability, innovation and resilience is how organisations and their supply chains will be judged in the future.
Becoming the green customer of choice
That said, there are also compelling revenue reasons for sustainability, resilience and increased collaboration with the supplier ecosystem to be seen as the watchword in supplier management. According to McKinsey & Company, leaders in supplier collaboration achieve 2x EBIT growth over and above competitors that don’t collaborate.
Increased supplier collaboration gives organisations more certainty of achieving their key sustainability objectives. Right now over 80% of greenhouse-gas emissions in most consumer goods categories come from the supply chain, so strengthening your responsible image by influencing suppliers and customers to buy differently and work differently, and driving sustainability through the supply chain will increase brand value, revenue and customer acquisition because you will become the ‘green customer of choice.’
These are some of the topics that we will be discussing at our Collaborate 2020 Virtual Summit, where we’ll launch our new SC&I platform to help companies improve their ESG ratings by actively collaborating across their supply chain. This will enable purpose-led companies to collaborate with vendors across their supply chain, helping to drive positive impact projects.
Having a better impact on the planet
It is great to see the increased focus on large companies having a better impact on the planet. Business leaders in these organisations realise that their efforts to improve ESG ratings can’t be limited to just internal initiatives but need to expand across their supply chain. I am really excited to be able to help companies move beyond monitoring supplier compliance to actively collaborating with suppliers on initiatives to improve environmental, social and economic impact.
What COVID-19 has taught us is that our world and the modus operandi that we do business in can change in a matter of months and that, as a society, we all need to be aware of how our actions impact future generations. I am pleased to see that ESG has now become mainstream and an issue that investors care about, whatever their motivations; this is good for society and the planet.