3 Reasons to Be Hopeful About the Future of Sustainable Finance
By Marie Klaeylé, MBA 16
Representing Berkeley-Haas CRB and MBA students, I attended the first Berkeley Sustainable Business and Investment Forum (BSBIF) which took place early November last year. This 2-day event brought together key executives from global socially-conscious corporations (such as PepsiCo and Intel) and top tier investors willing to better understand sustainability related risks and opportunities. Risk management and adoption of initiatives (both by company’s board and customers) were at the center of the discussions. I want to highlight and share with you my key takeaways from this one-of-its-kind conversation.
Three reasons to be hopeful about the future of sustainable finance:
1. Diverse stakeholders are engaged:
Only a few months after putting together the Dialogue on the White House National Action Plan for Responsible Business Conduct Abroad, the Berkeley-Haas Center for Responsible Business successfully organized another major event related to the future of sustainable businesses. With a little less than 100 participants for its first edition, the forum brought together key stakeholders of this sustainable business and practices conversation:
- Corporate world (PepsiCo, Intel, Visa, MasterCard, Adobe, etc)
- Major investors (BlackRock, CalPERS, CamberView, Fidelity, Morgan Stanley, etc)
- Academia (UC Berkeley, Ivey Business School, University of Leuven, etc)
- Audit companies (PwC, Sustainability Accounting Standards)
The number and quality of the participants is a sign of change: large corporations and investors are jointly looking for win-win solutions fostering larger adoption of sustainable practices. More importantly, academia is convening the discussion. This forum was jointly organized by the Bolt-Law School and Haas-Business School, providing a strong signal of the university’s willingness to develop the next generation of sustainable leaders
UC Berkeley is at the center of the conversation, emerging as a thought leader in this field.. Concern and commitment to act from top-tier universities and engaged corporate partners is a great step towards more sustainable business practices!
2. Leading corporations are committed to act:
The forum provided the opportunity to PepsiCo and Intel, two sponsors of the event, to remind us of the initiatives they’ve launched towards more sustainable practices in their industries:
- Mehmood Khan, Vice Chairman and Chief Scientific Officer, Global R&D, detailed the sustainability and nutrition efforts his company launched: -23% of water used since 2006, removal of 480,000 tons of sugar from carbonated soft drinks in 2014, and removal of 1,800 tons of salt and removal of palm oil from chips.
- At PepsiCo, innovation and sustainability are not seen as trade-offs vs. company success and financial return, they are actually driving growth and customer retention. In 2014, 9% of PepsiCo revenues (~$7bn) came straight from new and more sustainable products). Next considerations for the company include creating more sustainable packaging, keeping on reducing water footprint and raising customer awareness.
- Brian Kzranich, CEO of Intel, shared his vision of sustainability for Intel and the tech industry, deep-diving on 2 aggressive initiatives he launched in the past couple of years:
- Using only conflict-free minerals for its products (target achieved before end of year 2015), thus rethinking the whole industry’s data and supply chain management and bringing together a larger coalition of diverse stakeholders
- Securing full-representation of women and minorities in its US workforce at all levels by 2020, believing that more diverse teams will deliver better results (more innovation, more efficiency…).
The most critical enabler of these initiatives is the transparency the companies provide about their current situation and their future evolution towards meeting challenging sustainability goals. This transparency generated trust during the forum and beyond, and has proved Intel’s progress and leadership in this field, slowly creating followership from other players.
The biggest surprise: investors tend to understand and support this type of successful triple bottom-line management.
3. Agreement on the need to more adequately price carbon:
The fossil fuel divestment movement (targeting oil, coal and natural gas) recently gained momentum and raised awareness around the impact of fossil fuel and carbon on climate change. As companies’ management of carbon credits has started to become more fluid, it’s time to consider the next steps needed to achieve success. The best approach to adequately price carbon is for the most part is to correct three market problems.
- The first problem, due to voluntary initiatives, aviation exemption and lack of homogeneity between projects, is that the price of carbon credits today doesn’t reflect the social value of carbon production. This price is expected to increase as more companies will be willing or required to purchase them (marketplace). Companies and investors should be prepared for this and work upfront to reduce impact of this risk on their supply chain and operations. Let’s watch what will come out of the Aviation Coalition currently brainstorming on this topic…
- The second problem, due to the gap between current fossil fuel reserves and future expected consumption (esp. assuming we stay within the +2°C temperature increase considered as acceptable), is that 60-80% of oil, coal and gas reserves are unburnable. As a result “stranded assets” will become more common, thus dramatically impacting oil & gas companies’ assets and valuation. This is probably one of the reasons supporting Saudi Arabia’s decision to keep low prices and high volumes in recent months. The diiscounted future for oil: Time to divest? Time to hedge your portfolio against this risk?
- Finally, the third problem: the impact of carbon production and climate change is not understood outside of scientific models. This could be seen as a non-diversifiable risk for our society, which should thus call for risk premium. Indeed, emissions are currently priced based on expected damages (happening on the long-term and highly uncertain, thus highly discounted) when they should be priced based on related risks (including drastic changes in companies’ valuation).
What should be the appropriate carbon price? 30$/ton? 50$/ton? 100$/ton? There will still be huge debates between the scientific community, regulators, investors and their corporate counterparts. Even if there was a strong belief that carbon price should stay out of the political domain, few corporate leaders at the forum or otherwise question the need to drastically raise the price of carbon and prepare as off now the transition to a fossil-fuel-free world.
This makes me hopeful that carbon emissions and climate change may finally become under control, but it also makes me believe that a similar agreement could be reached on an appropriate price for water (maybe more tricky as access to water is now considered as a human right…). Between public subsidies, outdated water rights, lack of consideration of groundwater, the price of water is currently far from reflecting its worth for society and businesses. A topic for next year’s forum?
As demonstrated by the Berkeley Sustainable Business and Investment Forum 2016, appropriate triple bottom line management is now becoming a competitive advantage companies have to target. I believe change won’t be driven by customer demand, but by proven financial appeal for more sustainable business practices.