For years, those of us in the environmental/sustainability profession have sought credible ways and metrics for quantifying the economic value of our efforts, activities and programs. A myriad of studies completed dating back to the late 1980s attempt to demonstrate “environmental value”. Most of these studies have shown rather tenuous linkages or used meaningless metrics.
Interestingly, most of these studies link to equity markets – i.e., stock prices. Maybe because stock prices grab headlines, are tied to compensation or are the target to which Boards and senior executive generally manage.
The problem is that environmental/sustainability matters don’t fit into this model, either because they tend not to be financially material, or they don’t develop economic certainty within the “current quarter” myopia of corporate management, financial markets and analysts.
A recent article on the topic was published in The International News. The article includes an interview with Kevin Parker, CEO of Deutsche Asset Management (DeAM) on the subject of how capital markets currently view environmental/sustainability risks. DeAM manages over US$775 billion in assets.
With simplicity, clarity and unquestionable credibility from the financial market viewpoint, Parker made key points in the article and interview:
- Bond markets are poised to punish polluting companies in the aftermath of the Macondo oil spill and Fukushima nuclear crisis.
- “The process of re-pricing carbon and environmental risk has begun, because these two events were catastrophic.”
- By contrast, shorter-term equity and commodity markets have continued to chase high-carbon opportunities, including voracious emerging market demand for coal.
- But investors in longer-term debt including bonds will increasingly avoid unsustainable companies … an inexorable trend that will push up their borrowing costs.
- “What this boils down to be risk in capital markets, and capital markets know how to price risk once they understand it.”
Pension investment managers realized this years ago since they emphasize stability and a long-term investment horizon.
But there seems to be far less recognition of this by environmental/sustainability practitioners, as the amount of studies, white papers and pseudo-financial metrics is mounting, with continued emphasis on the equities side of capital markets. Perhaps the driving forces for this are general economic pressures facing companies are pushing staff to find ways to justify their existence and cost, consultants are trying to come up with that elusive short-term ROI metric for the cost of their services to clients and much of the HSE/sustainability media are vying for limited attention on the part of their readership.
Given Parker’s comments – and the lackluster historical success of valuation of environmental/sustainability matters in the context of stock prices – perhaps it is time to redirect our efforts at finding relevant and credible metrics.
In limited circumstances, financial value of environmental/sustainability initiatives can manifest in material and short-term impacts. Those instances give practitioners hope of riding those coattails. But generally, the reality is a little inconvenient.