The Urgency of Sustainable Finance: Why Every Business Should Prioritise ESG Factors
Sustainable finance is neither a fleeting trend nor an optional endeavour; it's an imperative for businesses seeking resilience and growth. In a rapidly evolving global economy, the integration of environmental, social, and governance (ESG) factors into investment decisions is a critical dimension of future success.
A report by IBM found that almost half (48%) of CEOs say increasing sustainability is one of their highest priorities for their organisation in the next two to three years. However over half (51%) identify sustainability as one of their major obstacles in the coming two to three years. They see a lack of data insights, uncertainty about return on investment, and technological obstacles as the main challenges [1]. This underscores the need for businesses to incorporate sustainable finance into their strategies, investments, and key performance indicators to effectively mitigate risk and seize new opportunities.
Transitioning to Secure a Viable Future
For instance, in the energy sector, businesses heavily reliant on fossil fuels face "transition risks" as markets shift towards renewable energy. A 2021 report estimates that "$1 trillion to $4 trillion of business value is at risk over the next 15 years if companies and investors fail to transition to secure renewable energy generation and sources" [2]. In contrast, companies investing in renewable energy and storage solutions gain an edge in accessing new markets and partnerships. Businesses must analyze how market changes and policy actions related to issues like decarbonization may impact their competitive positioning and develop adaptation strategies [3].
Building Resilience to Physical Threats
Physical threats, like floods and wildfires, are no less concerning, especially for industries like agriculture and real estate. I've long emphasised the importance of foresight in business, and a study by Deloitte highlights the potential economic loss of $14.5 trillion in the U.S. economy over the next 50 years due to climate change [4]. According to a report by the London School of Economics, the potential economic loss to the UK economy due to climate change could be as high as 7.4% of GDP by 2100 if current policies continue [8].
Businesses that think ahead, investing in site selection and resource efficiency, can build supply chain resilience and mitigate operating costs related to these physical risks. For example, multinational food company Unilever employs sustainable finance frameworks to enhance procurement and operations resilience, saving costs through efficiencies and partnerships with sustainable suppliers [5].
Staying Ahead of Evolving Regulations and Trends
New regulations surrounding issues like climate disclosure, environmental standards, and human rights due diligence are also driving sustainable finance in the private sector. Reporting requirements on ESG metrics and climate risk expose poor performers and reward leaders. According to analysis by the NYU Stern Center for Sustainable Business, companies with robust sustainability performance outperform competitors in the stock market by 1.4-2.7% higher stock returns annually [6]. Businesses must monitor emerging regulations and societal trends to comply with new rules and meet stakeholder expectations.
Unlocking New Opportunities
By adopting an integrated approach to sustainable finance, businesses can unlock opportunities around resource efficiency, workforce enhancement, customer relationships, and new markets. For example, companies striving to increase diversity, transparency, or community impact through investments attract strong millennial brands and loyal consumer groups [7]. New partnerships and revenue streams also emerge from investing in sectors like renewable energy, sustainable agriculture, and affordable housing. Corporate financing and operations lay the foundation for positive impact—by aligning core business strategies with sustainability, companies shape a better future for both business and society.
In summary, sustainable finance enables companies to bolster competitiveness, mitigate risks, and increase stakeholder value. By evaluating how issues like climate change may affect strategies, business models, and investments over the short and long term, companies gain insight into key impacts and dependencies. They can then proactively invest in new opportunities and risk mitigation. For businesses, sustainable finance is not optional or altruistic—it is vital for resilience and growth. Leaders who make sustainability central to corporate financing and management will thrive, while others risk endangering their future. The time for action is now. Businesses must make sustainable finance the new norm.
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Sources:
IBM Newsroom. (2022, May 10). IBM Study: Sustainability Ranks Among Highest Priorities on CEO Agendas, Yet Lack of Data Insights Hinders Progress
Carbon Tracker. (2020). Decline and Fall: The Size & Vulnerability of the Fossil Fuel System.
McKinsey Sustainability. (2022, January 25). The economic transformation: What would change in the net-zero transition
Deloitte (2022, January 25). Deloitte Report: Inaction on Climate Change Could Cost the US Economy $14.5 Trillion by 2070
Greenbiz Group Inc. (2020, August 17). Unilever sets out net-zero plans ahead of shareholder vote.
NYU Stern Center for Sustainable Business. (2021, August). ESG and Financial Performance.
Forbes. (2018, November 21). 88% Of Consumers Want Brands To Help Them Make A Difference.
LSUE.(2022, May 30). What will climate change cost the UK? Risks, impacts and mitigation for the net-zero transition
