Expect to learn:
- How the global movement toward a new, radical transparency around sustainability started.
- What unites the most sustainable companies in the world on the Global 100 list.
- Why Neste took a risk on cannibalizing its own business with offering renewable fuel solutions.
- Why a good business is sustainable, and sustainability is good business.
“Our house is on fire.”
The view of the Alps, crested in sky and ice, lent these gatherings an air of calm. In normal times, this helped to relax and promote consensus among delegates who arrived in Davos by helicopter, private plane and car, descending for the World Economic Forum.
But this year, things felt less calm. The outside world was present in the mountain retreat, and Greta Thunberg was its envoy. With eloquence and fervor, she spoke to the leaders at Davos of a warming world.
The Paris Climate Agreement, set just five years before, had targets that had seemed—even last year—somehow distant and theoretical, but eminently achievable. Not many now believe in even one of those.
Thunberg has galvanized public opinion. Her words have become the rallying cry that every shift in global consciousness needs. But a movement is already underway—and at a dramatic pace—at the heart of large corporations and businesses, and in the global investment community that rewards or punishes them.
And it’s not just practices that are changing, but the idea of sustainability itself.
The New Sustainability
Sustainable thinking has often seemed something of a ‘Wild West’. Company after company pitches up, spins lines and makes claims. And in the general lawlessness and confusion, some of it has stuck sticks.
There have been cases of lobby groups “greenwashing” unsustainable practices; this in turn has led to suspicion that a business only has to back some Corporate Social Responsibility (CSR) initiatives and gain the occasional small “green” accreditation for a product, and get some PR for it, to once again have its reputation clean. But greenwashing came at the expense of public trust. The lack of transparency—or of any universal accreditation that takes a holistic view of a company, activity, technology or product’s sustainability—has led to confusion and skepticism among corporate leaders, government and the wider public.
But now, in Big Data and the investment community, two unlikely allies have emerged that seem poised to change things—and fast.
Let’s talk about solutions
Lars Peter Lindfors is Neste’s senior vice president, innovation. He has seen first-hand this drive for fresh thinking in the search for technologies that can solve our most pressing problems—both at Neste, where he has been looking at sustainable strategies, overseeing research and development, technology, investment management and processes in the course of his career, and at various foundations and academies for technology promotion. He believes there is reason for optimism.
“The public has become aware of the continuing build-up of greenhouse gases,” he says. “I don’t think the ‘doomsday’ message is helpful. We need a positive mode; we need to talk about solutions. There are challenges, but people need to see the progress being made.”
Progress for Neste meant transforming its business to become a global leader in renewable fuels, with its own R&D department creating NEXBTL technology, which allows the company to produce top-quality renewable diesel from various wastes and residues as well as vegetable oils.
We are producing more, with less energy. GDP growth is no longer dependent on fossil-fuel consumption, and countries are using their already existing infrastructure to distribute clean energy. And sustainable energy sources—from wind, water and solar to sustainable aviation fuel—are emerging fast.
Lindfors believes in practical incentives for businesses to change their habits and create solutions that are more environmentally friendly. But encouraging people means informing them.
A single standard
The New Sustainability requires a 360-degree view of a company—taking in social and governance policies as well as environmental ones—which gives investors a better view of any business and its preparedness for the future, as well as discouraging greenwashing.
The impulse to put in place some kind of holistic measurement for sustainability goes back to 2015, when the UN set 17 Sustainable Development Goals to achieve by 2030.
Each goal had specific objectives and measurable indicators. They break down the multilayered reality of sustainability—from ending poverty, providing access to clean water and hygiene, and promoting gender equality and peace, to tackling climate change. It was an approach that sought to hold claims by corporations, governments and NGOs to an objective standard.
So, as an increasing number of global companies are becoming more sustainable, they are subject to scrutiny by auditors, independent consultancies and universities. And crucially, some businesses have begun holding governments and administrations accountable, by reinforcing international agreements and new sustainable frameworks.
To understand why this shift to a single unified view of a business’ sustainability and fitness for the future has taken so long, we need to go back to the aftermath of World War II.
An inconvenient truth becomes public
In the wake of the 20th century’s longest, costliest and most widespread conflict, developed countries were desperate for exponential economic growth—to turn their war economies into peace economies.
Increasing energy output was paramount for an entire production and distribution system dependent on transportation and oil inputs, and states geared everything toward increasing their supply of fossil fuel. Until the first serious oil crisis in 1973, world governments remained naïve—perhaps intentionally so—with regard to the problems of air pollution and over-reliance on a finite resource.
In 1959, theoretical physicist Edward Teller, a household name who had been dubbed “The Father of the Hydrogen Bomb” during the Cold War, walked into a symposium hall to deliver a lecture. He issued a warning to the American Oil Institute: a 10% increase in carbon dioxide emissions would be enough to melt the ice caps and eventually submerge New York City. He had already urged U.S. oil companies to create alternative solutions for fossil fuels. But his message was lost in the post-war boom of American consumer society.
The reputation laundry
Public opinion finally began to change throughout the 1990s, as large companies, informed by opinion polls on consumer trends, became more concerned about sustainability. Still, while forward-thinking companies took action – Neste’s research, breakthroughs and first patents for sustainable fuels date from this period – for others the change went less deep.
“Sustainability often used to be seen as a PR issue,” says Toby Heaps, founder and CEO of the influential Toronto-based media, monitoring, research and information organization, Corporate Knights, who research and compile the annual ranking of the World’s Most Sustainable Corporations. “It was seen as something that could be handled with a press releases or advertising.” This led to the term ‘greenwashing’ – for when businesses simply try to whitewash unsustainable practices.
This led Heaps to champion transparency as the primary tool for holding businesses to account on sustainability. Today, he sees the change in the way corporations think about and handle sustainability internally. As more data has become available, transparency has driven companies to incorporate more sustainable thinking into their core models.
“Now, companies are transferring sustainability from their comms departments to core functions such as Legal, Risk or Business Development,” says Heaps.
The public too has become better informed about sustainability standards. Meanwhile, rankings on global standards have become more accessible.
From black to green economy
Corporate Knights promotes what Heaps calls “clean capitalism,” by making investors more aware of the ecological, social and economic benefits of their decisions. Since 2005, it has released the Global 100 Most Sustainable Companies ranking, the coveted list on which Neste occupies a top-three spot.
Heaps argues that when you look at the companies at the very top of the list, those leading the change, there are certain factors common to them.
“There are leaders at the top of those organizations and cultures who are very comfortable taking a stand on what the future looks like,” he says. “They do not just go with the flow. They are what I would term future makers, not future takers.”
Corporate Knights’ research has identified a shift from treating sustainability as an “outboard” concern to viewing it as a true measure of a company’s preparedness for the future, and its insulation against shocks.
“In the 100 most sustainable companies, the notion of sustainability is not just part of the culture; it’s an integral part of the core strategy, with monitoring done by operations, legal or finance.”
“What is cool about this is that you can get insight into the souls of the companies and the investors by looking at what percentage of revenues and profits are invested in sustainable resources.”
The surprising thing, says Heaps, is that while the approach is the same, there are almost no other commonalities among the top 100. “Some are family-owned, some publicly listed, some have a state history, some private. But there are a disproportionate number of Nordic and Scandinavian businesses in there, because this approach is more common in those countries.”
Indeed, the knack of making solutions out of uncompromising resources is typically Nordic.
“We have always had a strong innovative element at Neste,” Lars Peter Lindfors says. ”All the major oil companies had access to large fields and upstream. We didn’t. So we had no choice, in a way. To compete and make money, we had to come up with another solution. We take renewable raw-material like vegetable oils and waste animal fat and use our own technology to turn this feedstock into top-quality renewable fuel. We add value through our own innovation. We were the only ones who innovated our entire model, who took a risk on cannibalizing our own business [challenging the conventional oil refining industry by offering renewable fuel solutions].”
Sustainability drives success
When Lindfors talks about successes, he talks as a scientist, acknowledging the role of collaboration, teams and the work that has come before. When he talks about Neste’s own success, he is as quick to point to milestones (“Even today, we are removing the equivalent of three million passenger cars a year from the road across the EU in terms of emissions”) as to the growth of the company’s balance sheet.
Still, the two imperatives are aligning for the first time, to form a new approach to sustainability that sees it as an enabler of sound business, not a brake.
The tipping point is that this time, investors are on board—not seeing sustainability as a hindrance or inconvenient drain, but as an indicator of likely business success over the longer term.
And all of this comes down to one new resource that is more plentiful and easily accessible than ever before: data.
Data may be the new oil. But in this case, it’s powering a strange and potentially decisive shift. Some of the emerging insights are catching investors’ eyes. And while it is early days for these data sets, some pleasant surprises are becoming clear.
A study from 2017 by Hermes Investment Management showed that companies with the weakest environmental, social and corporate governance (ESG) performance also tend to trade with the widest credit default swap spreads. This seems to be a strong indicator that investors now see that a corporate focus on holistic sustainability reduces a firm’s exposure to risk, and are therefore more willing to give them debt capital at a lower cost.
Another survey covering 2013–2017 showed that share-price outperformance often follows the act of issuing green bonds in itself; and that improved return on assets and ESG metric outperformance also attracts more long-term investors.
BlackRock’s research has showed that ESG-focused investment indices consistently either matched or exceeded the returns made by standard counterparts, amid similar pressure or volatility. ESG portfolios also show signs of being more resilient to market downturns, partly because of the greater vigor that came with their sustainable strategies.
There also appears to be some link emerging between sustainability credentials and better performance in other areas across a business.
While equity investors track enhanced returns from investments in ESG-focused companies in ways they often weren’t before, Toby Heaps and Lars Peter Lindfors both point out the need for thorough auditing. “We’re part of that drive to radical transparency,” Heaps says. “And companies such as Neste, to their great credit, have been completely transparent, even when they first switched and had to use some palm oil. They were transparent about it.”
Lindfors points out that this drive to arm the public and investors alike with “facts, not claims,” allowing them to make informed decisions on the path to take, is core to the New Sustainability.
“Because we are doing something new, we got more scrutiny from NGOs than the big oil companies,” he says. “But it was worth it. Because people need to trust you.”
And that’s the lesson. If the New Sustainability is anything, it is the vision that Heaps and Lindfors share: that business imperatives and ecological, social and good governance imperatives don’t need to be opposites, but can drive each other.
The days of “business is business” might just be coming to a close—and the days of “a good business is sustainable, and sustainability is good business” about to begin.