Long-term sustainability demands short-term goals
Companies have rushed to set 2050-linked pledges but robust investment strategies need to focus on immediate targets
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Coutts has partnered with The Financial Times Wealth Channel to support coverage of the most important topics, trends and news for today’s high-net worth individuals; here we share an exclusive story.
In March 2021, the UK government announced that nearly one-third of the country’s biggest companies had pledged to eliminate their carbon emissions by 2050.
“Businesses wield incredible influence to drive change across society and the economy,” Kwasi Kwarteng, Secretary of State for Business, Energy and Industrial Strategy, said at the time. “We need to harness this power to fight climate change.”
But as the clock ticks down on halting climate change, it is becoming increasingly apparent that setting goals pegged to a far-off date is not enough: The UN Emissions Gap Report now states that the world needs to halve its annual greenhouse gas emissions in the next eight years. For companies, long-term targets may not lead to short-term action.
With the proliferation of 2050-linked pledges, spurred by the Paris Agreement and now scrutinised at COP26, how can investors truly tell whether a business is taking the steps that are needed today to prepare for tomorrow’s sustainability challenges?
“Your long-term target is great – but who's still going to be around to check that you’re actually doing that in 2050?” says Karen Ermel, Associate Director of Responsible Investing at private bank Coutts. “What is way more meaningful for us is to see both the companies and asset managers that we work with make short-term commitments that we can track and measure.”
Investing along sustainable lines has grown exponentially in recent years, progressing from a relatively minor concern to what is rapidly becoming mainstream today. Sustainable investing strategies in 2020 racked up inflows of nearly $400bn – and total assets invested under environmental, social and governance principles surpassed $1tn for the first time.
The interest in getting this capital to account sustainably is clear: the Net Zero Asset Managers Initiative, an international group committed to limiting global warming to 1.5C, now constitutes $57tn, or about 50 per cent of global assets, while Climate Action 100+ has brought together 617 investors, with assets under management (AUM) of $60tn, to help transition the largest companies in the world away from carbon economies. But short-term goals are needed to ensure that the transition starts today.
The world’s clothing sector is a leading contributor to global warming. According to the United Nations’ Environment Programme (UNEP), the fashion industry produces 2 to 8 per cent of global carbon emissions. In addition, the equivalent of one rubbish-collection vehicle of used and discarded clothing is either burned or put into landfill every second. The UNEP also estimates that textiles are responsible for roughly 9 per cent of the annual microplastic entering the ocean.
Yet the US clothing company Patagonia is one of a growing number of businesses that are pushing back by taking immediate and measurable action: its goal is to achieve carbon neutrality, not only in its own operations but also across its entire supply chain, by 2025.
As of 2021, 87 per cent of the fabrics Patagonia uses for its clothes are made from recycled materials – a figure that has grown consistently in recent years. In just one example, the company is working with a California-based start-up to recover used nylon fishing nets – a major environmental hazard for the marine environment – and turn them into material for their garments. So far, the alliance has prevented more than 149 tons of nets in South America from entering the world’s oceans.
But Jenna Johnson, a long-time Patagonia Executive who became CEO in late 2020, argues that recycling is only a part of solving the sustainability equation. “We can’t use recycling as simply a solution to overconsumption,” she says. “We need to use everything we own for significantly longer, and then recycling becomes the solution at the very end of life.”
Meanwhile, the US shoe manufacturer Toms has centred its sustainability efforts on short-term goals and plans to make the cotton it uses 100 per cent sustainable by 2025. Instead of setting long-term targets for carbon reduction, the company has also pledged to reduce its footprint every year.
Toms has made a commitment to social justice an integral part of its business model as well, dedicating one-third of its annual net profit to grassroots initiatives that support equitable progress and communities.
“We can help by supporting the grassroots organisations and leaders working in and with their communities to create safer, healthier and brighter futures,” says Amy Smith, the company’s Chief Strategy and Impact Officer. “We do that by creating deep two-way partnerships, really listening to the needs of the community and taking smart risks on big ideas.”
B the difference
Both Patagonia and Toms’ short-term sustainability wins happened within their remit as B-Corporation companies. Being a ‘B Corp’ means they have achieved a certification that meets exacting standards of verified social and environmental performance, public transparency and legal accountability to emphasise purpose as well as profit.
Leslie Gent, Managing Director and Head of Responsible Investing at Coutts, points to how these typically set themselves apart by setting short-term, transparent goals that help investors to form a more accurate picture of overall performance.
“Some of the hardest decisions you have to make as an investor are those based on partial or difficult-to-understand information,” she says. “What is valuable about B-Corp companies is not only their commitment to sustainability but also their greater sense of transparency and openness.”
While B-Corp companies only make up a small proportion of businesses, they create a benchmark by which to measure other ventures’ approach to balancing profit with sustainability, says Gent. That, in turn, helps to set standards for engaging with all companies in terms of establishing goals for business, employees and the planet.
“An important part of an asset manager’s role is to use engagement and voting rights to push companies to become more sustainable more quickly,” she says. “Engaging as active shareholders to set clear, short-term objectives can effect change where it is needed.”
Taking short-term action on environmental as well as social and governance issues is essential for reducing a wide range of risks – from the effect of extreme weather events to staying ahead of government regulations and even retaining valuable employees through generous remuneration schemes.
But Gent points out that companies that set clear, short-term sustainability objectives also have a better chance of financial success – evidence that investing along sustainable lines is not a compromise and does not have to mean sacrificing returns.
“Strong governance and transparent short-term sustainability metrics are not, in themselves, a guarantee of financial success,” she explains. “But focusing on strong governance and putting environmental and social issues centre stage is a necessary ingredient for long-term financial sustainability.”