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Finding the ‘Alpha’ in the transition to a just, sustainable economy

Investment growth

Editor’s note: This article is the first in a series about the Ceres Roadmap 2030, a vision for sustainable business leadership in this crucial decade. The roadmap provides a 10-year action plan to help companies navigate and thrive in the accelerated transition to a more just, equitable and sustainable economy.

With investments in environmental, social and governance (ESG) assets doubling to $40.5 trillion globally during the past four years, it’s clear investors have sustainability threats on their minds.

It’s no wonder. Record-breaking wildfires, "Day Zero" water scares and the struggles in the U.S. to reckon with racism are just a few recent events that expose how systemic and pervasive sustainability risks can be. In response, more investors — from the largest asset manager BlackRock to individuals managing 401(k) accounts — are integrating ESG information into their investment processes to manage that risk.

But assessing risk exposure is only half the equation for successful investors.

The question for many is finding the "alpha" — or the opportunities for above-average investment returns — in the accelerating transition to a just, sustainable, net-zero emissions economy. Where are the big opportunities to capture growth? Which companies are on the path to create long-term value in this transition? 

For some companies, the sustainability value proposition is in their DNA — the business exists to provide a climate change solution, bring resources to underserved communities or address other environmental or social issues. 

But for the rest of the economy, I’d argue that the alpha can be found by looking at how companies truly integrate sustainability into their governance, core business strategy and operations. Alpha is found in companies that take concrete actions to not only mitigate risk but also to drive value by increasing resilience to climate change, improving water resources and advancing the respect of human rights across their value chains.

So how do investors assess a company’s integration of sustainability goals and governance into their core business model? It’s a field that is early in development. Competing data sources touch on many aspects of sustainability, but I would suggest investors should start with a comprehensive qualitative inquiry, digging into the most important issues by sector.

The Ceres Roadmap 2030 provides this comprehensive sustainability approach and can be a practical tool for investor engagement. Released in October, it is a 10-year action plan for companies to become sustainability leaders and take concrete, measurable steps to transition themselves and the wider economy towards a just, sustainable and profitable future. 

I’d argue that the alpha can be found by looking at how companies truly integrate sustainability into their governance, core business strategy and operations.

The roadmap identifies the issues most likely to disrupt the economy in the decade ahead — the climate crisis, acute water and natural resource scarcity and inequity — and the actions necessary to address them. It lays out credible, effective and appropriately ambitious action steps companies should take in five-year increments to help stabilize the climate, protect water and other natural resources and build a just and inclusive economy. 

Of course, the rubber meets the road in how companies actually carry out these critical actions. The Ceres Roadmap 2030 defines how well-managed companies integrate sustainability risk and opportunity into governance, strategy, execution and accountability. By paying close attention to business integration, investors can identify which companies are building truly sustainable, value-creating businesses. Specifically, investors should look for four key actions that signal a company is serious about embedding sustainability into operations:

Developing a business case that includes purpose. When a company’s purpose goes beyond short-term financial returns and instead demonstrates a greater sense of prosperity, the business is better able to inspire employees, build customer loyalty, strengthen communities and spur innovation. Unilever, the huge consumer products company, has brands built around the business case for sustainability. Its Sustainable Living business plan set targets for decoupling its growth from environmental impacts. Determining that about a third of the globe’s population uses its products, the company recognized its responsibility in shaping lifestyles and defined its purpose as making sustainable living commonplace. That purpose is also good for business. Last year, the company’s Sustainable Living Brands delivered 75 percent of its growth.

Determining both materiality and saliency of sustainability risks. Managing for success in this new business reality requires a much broader assessment of financially material risks and opportunities that include relevant sustainability impacts. Nestle realized the need to consider both material financial risk and risks that could emerge from negative impacts on the human rights of individuals and communities in their value chain. The company performs both materiality assessments and saliency assessment of human rights impacts to identify where ESG issues pose a risk to its business as well as when its operations pose a risk to human rights. Both are fed into its enterprise risk management framework, and its board oversees how the company acts on results.

Making scenario analysis part of strategic planning. Integrating sustainability into strategic planning and execution enables companies to challenge their own short-term thinking and reexamine their business models. Sustainability stalwart 3M infuses sustainability fully into strategic planning by integrating it into every future new product. Every product launched since 2019 embeds a sustainability value commitment to drive impact for the greater good. Since 3M introduces about 1,000 new products a year representing about a third of its sales, the plan makes quite an impact. 

Listening to stakeholder voices. Including key stakeholder perspectives in the planning process — through active engagement with employees, communities, shareholders, civil society and other stakeholders — strengthens resilience to future business disruptions. It also better positions companies to proactively act on opportunities rather than primarily reacting to risks. After the COVID-19 pandemic hit the United States, Best Buy started using employee feedback to inform store conversions and pay practices. Needing to adopt operations to the pandemic and temporarily close stores, Best Buy decided to offer shoppers curbside pickup instead — and relied on the expertise of individual store managers to develop strategies for how to do so.

As investors look to identify alpha in the months and years ahead, there is also an emerging and distinct differentiator of sustainable business leadership — companies that not only seek to change their own business practices but also to actively influence the systems they operate in to enable wider uptake of sustainable business solutions.

The interconnectedness of the sustainability threats facing businesses and communities adds a complexity that requires companies to deeply examine the systems-level change necessary to address the root cause of these massive issues. In this decade of urgency, it’s only together that the business community and governments can achieve the scale of change needed. 

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