Climate change is one of the most pressing issues facing our society today. The European Commission’s 2020 Climate & Energy Package calls for a 20 percent reduction in greenhouse gas emissions and 20 percent improvement in energy efficiency. In the U.S., politicians have begun proposing similarly ambitious legislation, with several states taking the lead on various clean energy initiatives. Even at the city level, industrial centers like Pittsburgh are playing a leading role in moving climate initiatives forward. However, for real progress to be made with climate change, we will need solutions that address the economic challenges that restrict many in doing what is right.
There are two recent reports that focus on the trends in environmental, social and corporate governance (ESG) reporting and the disclosure activities of leading publicly traded companies that caught my attention. The first by the Governance & Accountability Institute (G&A) stated that in 2019, 90% of S&P 500 companies completed sustainability reports which is a 350% increase over 2011.1 The second report, indicated that “greenhouse gas reporting by companies in the S&P Global 1200 index has risen from 45 percent of companies reporting on these emissions three years ago to 61 percent this year.”2 The number of companies addressing ESG risks and challenges confirms the importance of doing what is good for the planet can also be great for business. Ultimately, sustainability solutions need to be focused on three key outcomes: efficiency – which includes energy optimization and energy and operational efficiencies; resiliency – includes creating sustainable operations and a sustainable physical site; and accountability – which includes the comfort, wellbeing and safety of building occupants as well as accountability to shareholders, people in the community and the environment.
There are three key points, that in my opinion, show how economics are driving the interest in these key outcomes.
The first data point comes in the area of sustainable or environmental investments. From both market analysis and personal experience, ESG stocks are currently outperforming the market.3 “Institutional investors that apply environmental, social, and governance (ESG) principles to at least a quarter of their portfolios jumped from 48 percent in 2017 to 75 percent in 2019.”4 There will be an additional 200 new ESG funds in the next three years. “In the United States, for example, the two largest public pension funds - the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) - are required by California law to report the climate-related financial risks of their portfolios as of the beginning of this year.”5 This helps indicate that environmentally focused investors are influencing new behaviors in corporate America.
The second data point focuses on risk management. Banks and insurance companies are using ESG to manage risk profiles. The theory being, companies that are focused on ESG are better run and represent less risk. “Sixty-seven percent of banks screen their loan portfolios for environmental, social and governance risks, according to a survey published by Fitch Ratings.”6 In talking to insurance experts, underwriters are setting up special divisions to focus on meeting the needs of companies that focus on ESG as these companies represent less risk and are more attractive investments.
The third focal point is focused on changing consumer spending. Nielson research indicates that “Millennials are twice as likely (75% vs. 34%) than Baby Boomers to say they are definitely or probably changing their habits to reduce their impact on the environment. They’re also more willing to pay more for products that contain environmentally friendly or sustainable ingredients (90% vs. 61%), organic / natural
ingredients (86% vs. 59%), or products that have social responsibility claims (80% vs. 48%).”7 My personal proof point is my own children are influencing the products our family purchases based on the companies that meet their ESG standards.
“Kaizen” is a Japanese concept referring to the continuous improvement of business activities or translates to “change for the better.” In times of uncertainty, it is especially important for companies to continuously redefine themselves by identifying opportunities for improvement. Over ten years ago Honeywell Implemented the Honeywell Operating System (HOS) to drive continuous improvement of business activities with sustainability being a key part of the initiative resulting in Honeywell being 90% more greenhouse gas efficient and 70% more energy efficient. Focusing on key ESG outcomes of efficiency, resiliency and accountability can also lead to cost reductions. Honeywell’s continuous improvement initiative has resulted in an annualized savings of $90M.
One of the best examples of how operational efficiency has transformed a business or industry is the hospitality industry. In 2014 the Environmental Protection Agency introduced the WaterSense H2Otel Challenge to influence and encourage hotel guests to reuse towels and sheets. “The American Hotel and Lodging Association estimated that the request reduced the number of loads of laundry washed – as well as the related water, sewer, energy, and labor costs – by 17 percent.”8 As we look to the new normal, the path of those driving change today will provide direction in how we address ESG opportunities and challenges. Economic drivers and a renewed focus on continuous operational improvements is redefining the definition of the term “being green”. Recent reports show that Corporate America is recognizing that helping the environment can also mean helping your bottom line.
Arthur is the National Sales Leader for Honeywell's Sustainability Solutions Business which works with companies in the private sector to achieve their ESG goals. He has served as a sales and marketing leader for companies such as WEX, IDEXX and Honeywell and serves as a mentor for sustainable startup companies through CleanTech Open. Arthur would love to hear about your sustainability success stories. He can be reached at Arthur.Woolverton@Honeywell.com