How sustainability is understood by businesses and investors has changed dramatically since it was first considered within corporate social responsibility (CSR) in the 1960s. It has grown from being an annual report to shareholders of the actions taken in relation to a company’s broader social and ethical obligations to become an integral part of many companies’ business strategies. However, following the global adoption of the UN’s sustainable development goals (SDGs) and the Paris Agreement, the concept of sustainability is now more often associated with the integration of environmental, social and governance (ESG) factors. These ESG factors cover a wide spectrum of issues that traditionally may not be part of a company’s strategy or included within its financial analysis and reporting. This might include quantitative measures of how corporations respond to climate change, as well as the more qualitative social and governance factors such as workforce training, shareholder protection and board diversity, and how companies manage their supply chains.

There is no global agreement on corporate social or sustainability reporting requirements. Yet over 93% of the world’s largest 250 corporations do follow voluntary reporting standards such as those set out in the Global Reporting Initiative and report on their sustainability performance. At the regional level, the European Union (EU) does have unified sustainability reporting, enforced through Directive 2014/95/EU. However, much of the push behind the incorporation of sustainability into business operations is coming from the globalisation of supply chains, and mounting pressures from investors, asset owners, non-government organisations and the general public for companies to report on ESG risks. As a result, there are significant differences in how the US, the EU and Asia are developing frameworks, programmes and legislation to achieve the global shift to sustainability.

The funding gap

One area that has come to globally symbolise sustainability is the SDGs, developed by the UN and agreed by world leaders in 2015. They include environmental issues such as water, energy and climate change, along with social issues, such as education and health services. They also cover the private sector, with goals for employment and industry.

Achieving these goals by 2030 will be costly. Estimates range from $6trn per year upwards equal to the entire annual economic output of Italy, India and Canada combined.

Europe – money talks

In January this year, the European Commission (EC) laid out plans to cement sustainability into the European financial system. It suggested introducing a classification system of what is “sustainable” and measures to impose conditions on corporate reporting requirements and the duties asset managers had to investors. The use of an ESG lens in particular means that, from a financial perspective, it is easier for companies and investors to integrate sustainability into their investment decisions, because it is quantifiable.

Many of the EC’s suggestions are already being put in place. An accounting rules change will allow governments to keep certain energy transition projects off their national balance sheets. In doing so, the EC hopes to unlock plans that have been frozen for fear of increasing national deficits.

The mandates of Europe’s banking, markets and pension regulators are also being expanded to include sustainability alongside financial stability.

Central bankers are already on board. The governor of the Bank of England, Mark Carney, has said many times that climate change could be a source of financial risk and instability if left unchecked.

Likewise, De Nederlandsche Bank (the Dutch central bank) is looking at ways to factor environmental risk into lending, borrowing and insurance as sea levels rise.

And France, through Article 173, is already pressing ahead with measures to push companies and those who invest in them to assess and disclose the impact of their activities on the environment.

Further EU legislation should be agreed by 2019 to compel the financial industry to deliver the €180bn needed each year to hit Europe’s climate change targets.

China – sustainability an economic value-add

Rapid economic growth has left China facing some of the most severe environmental issues on the planet. They range from Beijing’s life-threatening smog to untreated sewage in the 80% of cities without formal treatment facilities. This rapid growth has also left it with significant social disruption as populations moved from rural to urban areas and new mega cities (those with populations over 10mn) have sprung up.

Whilst recognising the investment cost required, China views sustainability as an opportunity for its companies to develop innovative technologies that will allow the country to move up the value-added export chain. What is clear is that it wants a return on its environmental investments.

By focusing on research and development, China hopes to lead the world in environmental technology. The strategy is already paying dividends; China now accounts for a greater share of environmental patent applications than Europe or North America.

Both industry and China’s current-account balance are benefiting. From batteries to car manufacturing and solar power, China has already overtaken the US as the world’s leading environmental technology exporter. However, as noted by the Conference Board, China still has to contend with the social and economic pressures that have built up as China has developed. Failing to address these sustainability issues could have serious future cost, reputation and growth consequences for businesses in China.

US: The states and market rebel

President Donald Trump has made it very clear he is no fan of climate change initiatives. During his election campaign, he promised to bring US coalmines back to life. In office, he has promised to pull the USout of the Paris Agreement. In January 2018 he slapped 30% tariffs on imported solar panels. This has led US renewable energy companies to cancel or freeze investments of more than $2.5bn in large installation projects. This is more than double the about $1bn in new spending plans announced by firms building or expanding US solar panel factories to take advantage of the tax on imports.

But not everyone agrees with him. In June 2018 the US Senate rejected his plans for deep cuts to renewable energy research budgets and individual states are developing their own projects (see box) without the need for federal regulation.

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