The global economy is in the middle of a quiet revolution as the investment community reshapes it into something more sustainable. This change will impact every luxury business as lines of credit become attached to carbon emission targets, investments in unsustainable businesses crater, and ESG becomes more important than ever.
Our recent webinar explores the sustainable finance revolution. With Make My Money Matter’s Tony Burdon and Bluegem Capital’s Lapo Favilli, Positive Luxury unpacks the issues luxury businesses are facing and the positive actions they can take today.
For those that were unable to attend last week’s webinar – available to watch in full below – we have broken it down into the three key ideas that you need to be thinking about today:
ESG – Environmental, Social and Governance – not only forms the backbone of our assessment, but in the investment community it has come to signify a philosophy that underpins decision making. Investors that adhere to this philosophy are sometimes called responsible investors and they believe that it is both financially and ethically sound to invest in a company with ESG at its core.
To understand the difference between this and what has come before, you need to think about this in contrast to how historically many investors saw environmental and social impacts as negative externalities that could simply be ignored when looking at investment decisions. Now they are core to their decision making.
Bluegem Capital’s Lapo Favilli explained that when investors like Bluegem look at potential investment opportunities they now integrate ESG considerations in all phases of their investment. ESG is the lens through which investors now identify potential risks and opportunities. To give an example, incoming legislation on pollution can be seen as an opportunity for an ESG compliant business. All of these then feed into the eventual price investors are willing to pay for a company, drawing a direct line between sustainability and value creation.
Tony Burdon of Make My Money Matter explained that when a company is making efforts to become more sustainable and tackle the ESG criteria, it is essential that they are also thinking about the money they are investing into their pension scheme. MMMM recently did a piece of research with Aviva comparing moving an investment from a typical fund to a sustainable fund with actions that an individual could take such as reducing travel by car or eating less meat. The difference between moving to a sustainable fund is 21x more effective than any personal action an individual can take combined.
From this, it is key that employees and businesses must try to invest their pension into a fund that aligns with their values or pressure their current pension fund to become ESG compliant. It is one of the most effective sustainability decisions a business can make.
According to Lapo Favilli, every business must take climate risk into account – otherwise you are not costing things correctly. He explains that the mistake many businesses are making is that the environmental impact of decisions being made is not taken into account in traditional accounting. It is best for businesses to act on this now – legislation is coming that will force businesses to reflect all costs, even if they are not measured in profits to shareholders, and it is essential to stay ahead of this kind of social change.
Tony Burdon expanded on this, setting out how it is exactly the same for pensions. In his mind, if a pension does not consider climate risk in its portfolio, then actually it will not be delivering good returns because it cannot save wealth for pensioners in the future. This has driven an acceleration of awareness from companies and investors about risks and climate change that is driving organisations to do proper accounting. The example was given of BP & Shell, both of whom have lost billions in value recently because they did their accounts properly for the first time – factoring in the value of their assets given the reduction in oil and gas use in the future as our society transitions away from fossil fuels and towards net zero.
Factoring in risk is now a dominant issue and all businesses should be taking it into account when doing their accounting.
Watch the webinar in full below, or read our paper on The Sustainable Finance Revolution