Trucost Blog / 04 Feb 2016

The State of Green Business 2016

The State of Green Business 2016 report reveals that 2015 was the year that the investment community made critical commitments to finance sustainable growth.

Last year, in the GreenBiz and Trucost 2015 State of Green Business report, we addressed an elephant in the room. We called it sustainable growth.

At the time the trend was alarming. The largest 500 U.S. companies’ natural capital costs — the unpaid cost to the economy from pollution, natural resource depletion and related health costs — were up 22 percent since the economic downturn. For more than 1,600 companies listed on the MSCI World Index, natural capital costs were up 26 percent.

The challenge was clear: Identify successful business models that decoupled revenue growth from environmental impact.

Is this the year that we can say we turned a corner?

This year’s analysis shows that prior to 2013, the average annual growth in natural capital costs was 5 percent, which slowed to 2 percent in 2013. In 2014, this growth slowed further, to 1 percent for the U.S. companies and decreased by 8 percent for the global companies.

These are positive signals, but it may be too soon to determine whether we have reached a turning point and are headed in the direction of sustainable growth.

With less caution, we can say that 2015 was the year that the investment community made critical commitments to finance sustainable growth.

There was collective action. The Montreal Pledge, which commits investors to measuring and disclosing the carbon footprint of their portfolios on an annual basis, attracted 120 signatories representing just over $10 trillion in assets under management. And the Portfolio Decarbonization Coalition, formed to help cut greenhouse gas emissions by mobilizing institutional investors committed to decarbonizing their portfolios, smashed through its initial target of $100 billion, and is now overseeing the decarbonization of $230 billion in assets under management.

There were also independent statements. U.S. public pension giant California Public Employees’ Retirement System (CalPERS) — responsible for $274 billion in assets — announced it would start to engage more companies on climate change to ensure underlying companies in its portfolio are “aligned with the transition to a low-carbon economy.” And PGGM — the heavyweight Dutch pension asset manager with $199 billion in assets — said it would “take considerable first steps towards halving the carbon footprint of investments in 2020.” These are strategic shifts that have the potential to create change across the entire investment industry.

And a wealth of innovative financing vehicles began to boom, from “carbon-efficient” indices and funds to green bonds. According to the Climate Bonds Initiative, the green bond market soared to almost $42 billion in 2015, tripling over the past two years. And in December, China became the first country to issue rules on issuing green bonds, aimed at kickstarting a thriving green bond market to raise the $330 billion annually to invest in the country’s transition to a green economy.

At Trucost, we have been helping companies to provide investors with relevant environmental information since 2000. Our advice to companies is simple: Don’t make the mistake of thinking that investors aren’t taking account of environmental factors in their decision making simply because they aren’t asking. If you want to stand out from your peers and capitalize on green financing vehicles, you need to demonstrate that your company is well positioned to de-risk and decarbonize investment strategies — rigorously and consistently.

We can also say 2015 was the year 196 countries reached a historic agreement in Paris on climate change to limit global warming to “well below” 2 degrees Celsius and “pursue efforts” to limit temperature increases to 1.5° C. While the carbon reduction plans of individual countries are only enough to achieve a 2.7° C limit, the agreement establishes a mechanism to “update and enhance” them.

It is undoubtable that 2016 is the year for companies to best position their business models to capitalize on sustainable growth opportunities.

Around half of the largest U.S. and global companies have GHG emissions-reduction targets and even more have GHG emissions reduction projects already underway.

More organizations are extending their reporting to value chain impacts — and more are assuring their data.

The number of companies taking a more holistic, business-focused view of their environmental and social impacts by participating in natural capital initiatives is also on the up: 611 had made public commitments as of 2015, up 71 percent from 357 in last year’s State of Green Business and up 217 percent from the 2014 report.

Amidst all the positive signals we must distinguish a startling shortfall in the reported management of vulnerable water supplies. The scarcity of fresh water is increasingly acknowledged as a major economic risk, compounded by intensifying demand and a changing climate. Our findings show that relatively few companies report on their exposure to water risks — 23 percent of the largest 500 U.S. companies and just 16 percent of the largest companies globally, up from 12 percent and 10 percent in 2010.

Given the widespread attention to water shortages across the globe — and the costs incurred by businesses in drought stricken areas like California, large portions of the Middle East and Southeast Asia, and Sao Paolo, Brazil — we urge companies to address this critical issue. To start their journey, companies can take advantage of the Ecolab/Trucost Water Risk Monetizer — a free online tool identifying site locations and profits at risk.

And our view into the future?

Companies with mature sustainability programs need to ensure they stay ahead of the game by integrating environmental shadow costs in financial decision making, conducting net-positive assessments and setting science-based targets, including carbon, broader pollution impacts, water dependency, land use and other natural resource inputs. For companies that have yet to consider how their business will remain profitable in a low-carbon, resource efficient world, the writing is on the wall.

Now is the time to capitalize on sustainable growth.

Read the GreenBiz State of Green Business Report 2016