3 Simple Words to Sustainability

Many leaders would like their organization to be more sustainable. However, the path is not easy and one major challenge is dealing with the short-term demands of investors. In this article, Pooja Khosla, VP Client Development at Entelligent answers the following key questions:

The key lessons lie in three key words: Education, Engagement and Momentum. 

Dr. Pooja Khosla is an economist and mathematician with a deep interest in sustainability and the financial effects of climate change. She has nearly 20 years of experience in predictive modeling, microfinance and designing climate impact tools for investors, banks, corporations and other organizations like the United Nations. She has been working with Entelligent since 2016 developing its data science team, its Smart Climate system and its climate risk related products.

Entelligent (www.entelligent.com) is one of the most respected brands in climate risk assessment. It recently announced a partnership with Société Générale to launch an index to score companies in the S&P 500 on their exposure to environmental issues. 

I began the conversation by asking her what the key issues are holding back firms from becoming more sustainable, more quickly.

Pooja: “There is certainly a lack of understanding of the issues. For example, some organizations sign up for a Net Zero commitment without understanding what they have signed up for. They do not realize that the scope of the commitment could include their whole value chain from suppliers down to their end consumers.

There is also certainly a problem with greenwashing. It is easy for firms to aim for minimum acceptable performance, like complying with environmental regulations, and then beefing up their messaging to make it appear that they are committed to sustainability.

90% of S&P 500 Index Companies published Sustainability Reports in 2019, however, less than 11% of the organizations were meeting qualified reporting standards.“

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:

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.”

To conclude, I asked her what key messages she would like to offer any green change agents out there.

The journey to sustainability is not easy. However, focusing on these three words will help to ensure your efforts are well invested.