Utrecht, June 2021
Articles regularly appear about the difficult relationship between sustainable investment and the reduction of CO2 emissions. However, sustainable investors have to consider many more factors and the most relevant KPI for sustainability is certainly not just CO2.
Organisations that implement a broader strategy for sustainability without a higher total cost of ownership are the winners of the future.
A broader understanding of sustainability
Organisations that reduce their CO2 emissions may be less vulnerable to price increases of emission rights or fossil fuels. Nevertheless, direct emission reduction is only a limited view of sustainability because it says little about the emissions of customers or suppliers. Emission reduction by organisations also says little about improving energy use, raw material consumption, land use and biodiversity.
Energy consumption and CO2 emissions are confusing units. Often, an organisation is more efficient with a higher energy consumption per employee – how to achieve as much output as possible per employee – but CO2 emissions then say nothing about how sustainable a company is. Conversely, there are also examples of low CO2 emissions per employee where high social costs are assumed, think for example of cattle breeding or the generation and use of nuclear energy. In short, CO2 emissions and energy consumption are rather poor leading indicators as predictors of financial result.
Waste production (or excessive use of raw materials), on the other hand, is a good and sustainable predictor of financial result: the more waste an organisation produces, the worse the production process functions and the worse the competitive position is. Certainly now, in the wake of the pandemic and conspicuously disrupted production chains, raw material consumption is proving to be an important factor in determining a company’s cost price.
Three steps towards a sustainable business
In order to convince investors to invest in sustainable companies, sustainable companies want or need to show that they really are, for example in accordance with the new EU rules for the annual report of large companies. However, transparency is only step 1 of sustainable business.
The second step is to actually reduce the negative impact of one’s own actions on future generations. A True Price, i.e. translating the social and ecological costs of the impact of one’s own business operations into the price of one’s own products and services, is a strategic tool that the Chief Risk Officer will gladly embrace. For example, it helps to see where in the production chain there are risks of future price increases. This is important, because sooner or later the bill for overburdening people and nature will have to be paid. Unfortunately, for some organisations, such an analysis also exposes the possibility of things happening that we find unacceptable in the future. Very recently, the judge in the climate case against Shell took a stand on this. The frameworks for sustainability reporting such as GRI, SASB and IIRC are still forgiving in that respect.
For truly sustainable organisations, step 3 is the most important. This step is about what customers do with the services of those organisations, for example driving or living without emissions or waste. Companies that can offer this without a higher total cost of ownership and with a good score in steps 1 and 2 are the winners of the future. Now that the first blows of the pandemic have been dealt, it has become even more urgent to get to work on this. Investors who actively steer towards improving steps 1, 2 and 3 can do good business.