We then turned to her thoughts about the answers to these challenges.
Pooja: “One thing to bear in mind is that 20 companies in the world contribute to one-third of global greenhouse gas (GHG) emissions. That means that whatever improvements we can make in these few companies and their value chains will have a significant impact on global emissions. Of course, most of these companies are in the fossil fuel business and it is not easy to turn them around. However, we have seen a flurry of recent announcements (for example at ExxonMobil) about a much stronger commitment to sustainability which gives me hope that this sector is now turning.
A key to delivering real change is education. Investors are now much more knowledgeable about climate risk and its financial impacts. More investors understand that sustainability can affect valuations in the short-term as well as the long-term. They have seen the dire effects of sudden extreme weather events on agriculture, hospitality, and transport and the rapid damage that a consumer revolt can do to the brand of a polluting company.
We should note though that the actual levels of pollution or climate exposure in a firm is not the key metric. What is more important than actual levels is the rate of change. A firm that is maintaining its rate of progress towards sustainability can be more attractive to an investor than one where progress is slowing, possibly because all the easy actions have now been done.
We also need more engagement. First of all, we need more engagement from leaders. There is no doubt in my mind that some firms really are committed to becoming sustainable and are sustainability leaders in their sector. I would put firms like Ingersoll Rand and Volkswagen in this category. They are led by visionary leaders who are engaged with the issue and are driving it passionately. They do a better cost-benefit analysis of sustainability options. They also have a better understanding of the three types of climate risk. These are:
Climate transition risk. This is the risk that the organization does not change sufficiently in the desired time period
Climate physical risk. This is the risk to the organization from climate change including rising sea levels, hurricanes, floods etc.
Climate reputational risk. This is the risk to the organization’s brand reputation from its contribution to global warming.
Then there is the next category of firms that are the sustainability followers. They are keen to progress but lack the understanding and engagement of the sector leaders. Finally, there are the sustainability laggards. These are the slowest to change and see sustainability as a business distraction.
More engagement is also needed from investors. Things are moving in the right direction and we have seen great examples of good investor engagement recently, for example, in the latest annual letter to CEOs from Larry Fink at BlackRock where he makes it clear that he is looking to invest more in sustainable companies and less in unsustainable ones.
We also need more engagement from customers. Consumers and businesses need to tell their suppliers what is expected of them and move their spend to the most sustainable suppliers.”