Sustainability – getting better all the time

Our evolving personal attitudes are creating momentum for sustainable change across business, government and society. As well as acknowledging the scale of the sustainability challenge, we should celebrate our progress so far.

It’s easy to be ground down by the daily news about sustainability. Insect numbers are falling dramatically, spelling the end of some ecosystems and threatening farmers’ ability to pollinate crops. Children’s life expectancy will be shortened by 20 months on average by breathing toxic air in the world’s cities. And the polar icecaps are melting as a result of climate change – stranded polar bears and extreme weather are just two symptoms of the catastrophe that potentially awaits us in the decades to come.

But back up a minute. Is this all bad news? Clearly the world faces immense sustainability challenges. But our awareness of them is greater than it’s ever been before. Psychiatrists say that once we start acknowledging our problems, we take the first step to recovery. Sustainability feels less attainable than before only because we are finally recognising the scale and breadth of the problems we must fix to make our world a better place.

That doesn’t mean we should slip into complacency and pat ourselves on the back for a job well done. We need to do more. But much is being done – sustainability is at a tipping point. We should feel inspired by the actions of millions of schoolchildren around the world in striking to prevent climate change. And the sense of outrage that has emerged about plastics in our oceans or gender equality issues in the wake of the #MeToo movement should be heartening, not discouraging.

“We can feel we are making progress”

As Gerben Hieminga, ING economist and co-author of the report Technology, a climate saviour? notes, “If you look at climate change and sustainability from a global perspective, it’s easy to be pessimistic or even cynical about our ability to achieve the Paris Agreement targets to avert climate disaster”. In such circumstances, you might imagine many people would just bury their heads in the sand.

In fact, the opposite is true. Most people are aware of sustainability. And many make conscious decisions every day to act sustainably, even if it is just cycling to work. Rather than fretting about global issues over which we have limited control, many people are taking a more rational approach by narrowing down sustainability to their personal impact on the world, says Hieminga. “By eating less meat, not taking flights for our holidays, or installing solar panels we can have an impact at an aggregate level and also feel that we are making progress."

Crucially, these decisions have a knock-on impact on businesses. As consumers, we no longer make decisions based solely on product selection or price, according to a recent report by Accenture. Instead, we want to know what a brand says, what it does and what it stands for. “[Consumers] support companies whose brand purpose aligns with their beliefs. And they reject those that don’t, with one in five walking away forever”.

Moreover, consumers’ beliefs are increasingly sustainable – even in the US, which many assume to be among the least receptive countries to persuasion about the impact (or reality) of climate change. Accenture’s most recent global survey of nearly 30,000 consumers in 35 countries, including more than 2,000 in the US, found that 62% of respondents want companies to take a stand on issues such as sustainability, transparency and fair employment practices.

How consumer attitudes are changing

To remain successful, companies have to respond to changing customer preferences. To take one industry, in past decades fashion retail has focused on low-cost items and responding quickly to new trends because that’s what we – as consumers – wanted. By 2014, we were buying 60% more garments a year than in 2000 and keeping them in our wardrobe for half as long as we did 15 years ago. This provided work in developing countries but it was often low paid, potentially dangerous and bad for the environment.

But attitudes are changing fast – and so is fashion retail. Already, nearly half of consumers prefer to buy clothes from companies that try to reduce their environmental impact; that rises to 60% among under-24s, according to Samantha Dover, senior retail analyst at Mintel. A report by McKinsey in October 2018 found that 78% of the top 100 US apparel executives believe sustainability is somewhat, or highly likely, to be a key purchasing factor for mass-market consumers by 2025.

Of course, companies don’t just have to appeal to their customers; they must also maintain a positive profile with the broader public. Firms spend a huge amount on advertising and public relations to be seen as responsible corporate citizens. And public expectations are high: the 2019 Edelman Trust Barometer shows 76% of people believe CEOs should take the lead on issues such as equal pay, discrimination and the environment, rather than waiting for governments to impose change.

One way that companies in the fashion industry – and many other sectors – can boost their sustainability is by reshaping their supply chains. Two decades ago, many companies moved production to Asia; that cut costs but often had a negative environmental and social impact. Now higher wages in China, falling automation costs and growing consumer interest in sustainability could prompt a wave of near-shoring, according to Rico Luman, economist at ING. Ironically, President Trump’s trade war with China, by imposing tariffs on imports, could potentially accelerate this trend, reducing pollution associated with logistics and enhancing sustainability.

Finance plays its part

Companies are also becoming more sustainable because they need shareholder support, funds from bond investors, and credit lines from banks and the financial system is undergoing unprecedented change.

Investment that considers environmental, social and governance (ESG) factors is now big business. Morningstar (which defines the ESG broadly) calculates that assets under management rose 60% from 2012 to October 2018 to reach $1.05 trillion. In a now famous letter, Larry Fink, CEO of the world’s largest asset manager BlackRock, said that investors should expect “every company [to] ... show how it makes a positive contribution to society.” More recently, he claimed that within five years all mainstream investors will use ESG measures to value companies.

In the debt markets, a similar two-pronged attack is underway. In 2018, a record $247 billion worth of green, social or economic sustainability-themed debt instruments were issued – $25.5 billion came from China alone. At the same time, ESG criteria are becoming standard in credit analysis. In recent months, both Standard & Poor’s and Fitch have announced they will now explain how ESG factors influence their rating decisions.

Banks also play an important role in promoting sustainability. ING is steering its lending portfolio in line with the well-below 2° goal of the Paris Agreement, for instance. “We balance our consideration of potential risk and return with our societal responsibilities,” says Stephen Hibbert, global lead, energy transition at ING. “We do that by following the sustainability debate and seeking to understand how it affects our business and, as importantly, by understanding the impact of our business on sustainability. In particular, that requires an examination of our financing activity in the energy sector, which spans oil and gas as well as renewable energy and power production.“

Gaining government support – both west and east

Regulation and government policy are perhaps the most important driver of sustainable change. Most obviously governments can set energy policy that provides a robust and reliable pathway for energy transition. “We can’t rely on private or commercial solutions to address all our climate change challenges,” explains Hibbert. “We don’t currently have an effective global carbon price, for example, and that will require coordinated action by governments to achieve.”

Hibbert notes that it can be difficult for government to address the big sustainability issues. “They have other objectives they need to manage at the same time and what can seem like simple solutions for climate change may have significant consequences for tax income, for instance,” he says. “Also politicians necessarily have a shorter-term horizon than the climate change issues they need to address: it’s hard to impose short-term costs on voters if you’re about to fight an election.”

Nevertheless, small regulatory changes can have rapid consequences. To return to the fashion industry, in 2007 France required clothing, linen and footwear companies to take responsibility for products at the end of their life. In 2009, France collected 1.9 kg of discarded clothing, linen and footwear per person each year; by 2016, it was 3.2 kg. More than 90% of what is now collected is recycled or re-used.

Progress is being made in Europe and the US. But it will count for nothing if sustainability doesn’t go mainstream in Asia. Countries such as China and India account for an ever-greater proportion of the global economy and therefore are becoming more critical to global sustainability; internal flights in countries such as India and China will account for a large proportion of the expected 218% increase in passenger kilometres in the years to 2050, according to ING’s Technology, a climate savour? report.

In the west, sustainability is often aligned with ideas such as democracy, openness and human rights. Christopher Coker, author of The Rise of the Civilizational State, points out that many of these are seen as hostile by China, which is edging out western values in Asia and Africa (partly through its trade and infrastructure Belt & Road Initiative). That should spell bad news for sustainability. But in fact, China has become an enthusiastic proponent of environmental sustainability.

Pollution (and to a lesser extent workers’ safety) have become more politically palatable in recent years as China’s government seeks to dissipate pressure that could threaten the status quo. China also recognises the huge economic benefits of its commitment to renewables and its growing strength in sectors such as electric vehicles. Geopolitics are also important. In July 2018, following the announcement that the US would withdraw from the Paris Agreement, China reaffirmed and strengthened its cooperation with the EU on climate change and clean energy, garnering praise for its farsightedness.

A positive feedback loop 

Individuals, society, businesses, finance and government don’t exist in a vacuum. Each overlaps and is intricately linked: our attitudes to sustainability affect our behaviour and consumption patterns, our expectations of companies (that we work for, buy from, or bank with), and the way that we vote. The auto sector is a good illustration of this; regulations, corporate innovation and personal attitudes are all spurring a shift towards electric vehicles.

Despite endless negative news, it is clear there has been a fundamental change in how government, society and business consider sustainability. We are now enjoying a positive feedback loop that is reinforcing and amplifying change. For instance, ING’s Hibbert says the energy transition required to meet the Paris Agreement targets is already underway. “The world is committed to the UN Sustainable Development Goals and the Paris Agreement and these are reflected and reinforced by numerous private sector initiatives, such as RE100, which commits businesses to 100% renewable electricity. Sustainability challenges are causing changes to the energy marketplace, creating new risks and opportunities that the banking system must respond to,” he explains.

At its heart, sustainability is simply a recognition that every action has repercussions – for other human beings and the wider environment – and that (despite Elon Musk’s Martian ambitions) we are destined to live on the same planet for the foreseeable future. It is both appropriate and heartening therefore that sustainability is growing in a very organic way around the world. As each part of society adjusts to the new realities required by sustainability, a further evolution takes place.

Defining a sustainability tipping point is probably impossible. We may already be there or it could be a decade away. To a large extent it doesn’t matter. Sustainability is now on nearly everyone’s agenda. And it’s not about to disappear.


The View is the online magazine of ING Wholesale Banking