FINANCE
By Amanda Gray, Partner at Addleshaw Goddard
Climate change is the biggest risk of the 21st century, and we’ve seen many regulatory and policy changes from multiple governments and industry groups in a bid to help businesses set and hit targets. But there is an unlikely group of ESG activists emerging.
This year, banks and financial institutions with collective assets of over $70 trillion have committed to cutting their greenhouse gas emissions by 2030, with an overall goal of reaching net zero by 2050. Barclays, HSBC and Axa are among the 160 firms that have joined the Glasgow Financial Alliance for Net Zero (GFANZ), chaired by Mark Carney, former governor of the Bank of England. This public commitment from leading global firms has the potential to really drive change.
Recent research by Addleshaw Goddard confirms that finance providers are putting sustainability at the heart of their strategies: 45% of the finance community say that sustainability sits in their top two priorities, and that percentage is set to rise.
And businesses are taking notice. But, with just 21% of companies putting sustainability in their top two priorities, are they doing enough to retain the support of these key stakeholders?
Our research reveals that companies are feeling the pressure from financiers. In fact, pressure from banks is outstripping pressure from every other source, including staff, media and end-customers. And it is having an impact: over nine in 10 business leaders say that banks have been significant in influencing their business to act more sustainably. This means that banks now hold more influential power over businesses than governments (87%).
The research also shows that although banks are exerting the most pressure, it is investors that are currently asking for the most evidence. Almost all businesses (99%) have been asked by investors to provide evidence of their sustainability performance over the last 12 months, while almost half (47%) have been asked for evidence by banks, and a fifth (19%) have been asked by insurers.
Businesses are becoming aware that their approach to sustainability will increasingly influence their access to funding. To ensure future success, boards must now ensure that sustainability is a strategic priority.
Survival of the greenest
With financiers in all their forms driving their own sustainability initiatives, having a strong sustainability strategy in place is crucial, not only for businesses to survive, but to thrive. ESG strategies are being used as a barometer for success: our research shows that almost three-quarters (74%) of lenders, investors and insurers believe that a business’s sustainability strategy is a key indicator of its future profitability and viability.
Furthermore, almost two-thirds (65%) of the finance community say they already always formally assess organisations on ESG or sustainability criteria, and 84% won’t offer services to companies lacking a clear net-zero strategy.
However, there is an emerging disconnect between what these stakeholders are looking for and what businesses are currently providing. While 86% of finance providers say that the sustainability strategy communicated by a company’s CEO is critically important to access their services, only 7% of businesses proactively communicate their strategy externally. If they want to keep the financial community on side, businesses need to show that their environmental agenda is being championed from the top-down.
Sustainability is directly influencing access to funding – and this situation is only going to accelerate. Companies that fail to make sustainability a strategic priority risk being cut off in the not-too-distant future.
These findings show that this is a very real threat: one hundred percent of financiers surveyed plan to turn off the funding tap in at least two sectors within the next four years to businesses that lack a transition strategy. By 2030, almost all finance providers anticipate that they will stop lending to any business that has failed to adequately address this. For the half of companies that don’t currently have a plan in place, this is a daunting prospect.
Time for action
Time is running out and business leaders need to step up, and fast. The transition to a sustainable future is happening, and early movers have demonstrated that this doesn’t have to come at a cost – the investment required can be cost neutral or result in a net gain. You must have a transition plan if you are to secure future funding.
But although the fear of no funding may be the ultimate catalyst for change, funding alone is not enough to help business leaders make the right decisions with respect to social and environmental impact. All stakeholders need to effect positive change for business to unlock the full opportunities of a sustainable future.
