Sustainability is no longer a differentiation point for a business. It is a licence to operate. Historically, investments in sustainability have been regarded through a narrow return-on-investment lens. The question was never ‘is this the right thing to do?’, it was ‘will this help us sell more?’. But 2020 has changed that.
There is growing evidence that by instead focusing on ‘people and the planet’, businesses can generate greater long-term value. As a result, global investors, pension funds, and financial institutions are demanding that the companies they invest in incorporate, track and report Environmental, Social and Governance (ESG) performance.
Luxury is catching on. Traditionally, luxury has been associated with excess, rather than sustainability but the changing attitudes of consumers are driving massive change in every corner of the industry. The differentiator is no longer whether a company ‘does’ sustainability, it is now whether they have operationalised it in their organisation.
At IWC, the responsibility is now co-owned by the CEO, the Head of Marketing, and the Head of Sustainability, which has led to improvements like a 50-80 percent reduction in packaging and being the first luxury watch brand to be audited to the Responsible Jewellery Council’s stringent 2019 COP standard.
Sustainability also touches every corner of champagne producer Krug, which decreased water consumption by 33 percent in the disgorgement and rehydration process in just three years, recycled or recovered 100 percent of its water, and reassessed their relationship with their growers to ensure a truly equitable social framework. These changes are emblematic of an industry that is now in flux. From multi-brand retailers like Selfridges to hotels like the Peninsula Group, 2020 saw luxury brands pushing beyond the talk and making real lasting change.
Today marks the release of Positive Luxury’s annual predictions report, Business in the time of COVID. The report looks at how this devastating human tragedy has been strangely uplifting for anyone with an eye on sustainability. The report explores innovations, working in a virtual environment, Diversity & Inclusion, and how ESG now sits at the forefront of boardroom conversations.
The full report can be downloaded here.
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ESG investment has been on the rise for some time. In 2019, green bonds reached an unprecedented $255 billion globally, led by China, France and the US. The new President of the European Central Bank (ECB), Christine Lagarde, has stressed her commitment to combating climate change and examining green changes to the ECB’s activities, including its €2.8 trillion asset purchase scheme.
In 2020 Larry Fink, Chairman and CEO of BlackRock, used his annual letter to the leaders of the world’s largest companies to announce that the climate crisis would reshape the future of finance. “In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.” Climate change, he wrote, is the top issue clients worldwide raise with him and he declared that ESG will be central to BlackRock’s investment approach. This may be the tipping point for sustainable investing - BlackRock, the world’s largest asset management company, prioritising sustainability.
Two months later, when COVID-19 hit, Fink doubled down - “The existential health risk of COVID-19 has only made climate risk and ESG a larger component of the investing universe. We have seen record inflows into sustainable products".
The value of global assets applying environmental, social and governance data to drive investment reached $40.5 trillion in September 2020 according to research firm Opimas. Product development in this space boomed in 2020, with 166 new sustainable funds launched between July and September.
Recently, Bain & Company analysis classified ESG investors into three categories – those focusing on financial returns and compliance with existing regulations, those scouting for companies doing the right thing and those impact investors who focus on social or environmental metrics.
Analysis from PwC also shows that ESG-aligned funds cumulatively outperformed their traditional counterparts by 9 percent from 2010 to 2019. Its research also highlighted that diverse companies, in which more than 30 percent of leaders are women, are, on average, 15 percent more profitable than their less diverse rivals, while businesses that score highly on sustainability tend to outperform those that don’t.
If as a company you are seriously thinking about activating and operationalising sustainability, incentives and opportunities are on the way, with the European Union, UK, New Zealand, Chile and China amongst others chasing ambitious targets for reaching net-zero emissions while ensuring economic growth. In the US, President-elect Joe Biden is also aiming for a 100 percent clean energy economy and net zero no later than 2050.
Businesses can help governments achieve these ambitions and the financial sector will play a key role in supporting that transition. Former Bank of England governor Mark Carney addressing the financial community at an event in London remarked, “Achieving net zero emissions will require a whole economy transition – every company, every bank, every insurer and investor will have to adjust their business models.”
For investors this is a golden opportunity. Not only is a net zero carbon economy inevitable, it will also be profitable, not least because investors are already being driven to adopt ESG by the demands of their customers. According to the 2019 survey by Morgan Stanley Institute for Sustainable Investing, 95 percent of millennials expressed an interest in sustainable investing alongside 85 percent of the general population in the US.
There are challenges in tracking and measuring ESG data because of the difference in reporting rules between different territories, although certification standards like the Butterfly Mark offer investors confidence through a combination of self-reporting data from companies, natural language processing and Artificial Intelligence (AI).
In the luxury goods industry, ESG alignment is essential. Luxury brands need to think of themselves as agriculture and mining companies as well as designers, working out strategies to internalise the impact of their entire supply chains, even if they are outsourced.
François-Henri Pinault, Chairman and CEO, Kering spoke at La Tribune’s Forum Zero Carbon 2020 event in Paris, “If markets apply the same kind of pressure when it comes to environmental issues and indicators as financial criteria, large international groups of all industries could move extremely fast".
He added that over the past two years, investor presentations are beginning to include criteria linked explicitly to the environment, social and governance issues in addition to the financial criteria.
ESG-driven financing has seen a flurry of activity amongst the luxury fashion companies in 2020. Chanel and Burberry issued bonds linked to their environmental goals, while Ferragamo and Moncler took on sustainability linked loans and credit agreements. Back in 2019, Prada took a 5-year loan which allowed for an annual interest rate adjustment if key ESG targets were hit.
The same pressures apply to luxury travel, from hotels through airlines to private jets. Travellers are concerned about the environmental impact of their holiday while investors are increasingly likely to examine a hotel’s green credentials. A strong ESG based corporate strategy tends to improve financial performance.
Chris Davis, Senior Director of the Investor Network at Ceres, an organisation aimed at promoting responsible investment, says larger companies are starting to realise that sustainability should be a central part of their corporate strategy. “Increasingly, institutional investors are starting to demand that the companies and other assets they invest in pay attention to environmental and social factors.”
For investors, diversity - crucial to a company’s governance credentials - is becoming a sign of increased profitability. Harvard Business Review found diverse teams are able to solve problems faster than cognitively similar people. When diverse teams made a business decision, they outperformed individual decision-makers up to 87 percent of the time. McKinsey found that companies with more diverse top teams were also top financial performers.
The ‘business of sustainability’ is now truly coming of age.
Positive Luxury helps brands adapt to the new sustainability economy. We support our clients with expert advice, industry analysis and independent certification, keeping them at the forefront of the world’s rapid transition towards a sustainable future. We established The Butterfly Mark, an industry-leading certification that highlights luxury businesses with a positive impact on nature and society as a whole.
Download the full predictions report here.
Cover Image: Prada. Photo: Courtesy.