US$5 trillion (RM20.2 trillion) to US$7 trillion — that is the estimate of annual investment across sectors and industries that is required annually to meet the United Nations Sustainable Development Goals (UN SDGs) by 2030, according to UNCTAD’s World Investment Report 2014.
Tons of opportunities, then. Unfortunately, this is not quite the case, as a considerable amount of the SDG needs are in infrastructure that requires a significant long-dated debt that typically comes from banking or debt capital markets.
Most of the investment needs will be in emerging markets, which do not necessarily have the set-up to issue in capital markets effectively. With infrastructure investment often in US dollars, it means banks, development banks and certain funds will take the lion’s share of these opportunities, and maybe later down the line share it with retail investors through investment vehicles.
So, what is the growth opportunity that we are seeing for everyday companies? Well, we need to move away from the highlights and dig deeper. Is sustainability an intrinsic growth driver for companies? Does capital seek companies that are sustainably more ready?
Here is a simple truth: All else being equal, people will take the progressive option over the neutral one. Meaning, you would buy the same article of clothing from a merchant who employs disadvantaged people over the merchant who is doing a regular clothing business. Similarly, given a choice between an e-hailing company that provides a diversity of cars over those that use only hybrid or electric cars, you would go with the latter.
There are ramifications of this for incumbents and new entrants into a market. It means that if a company can innovate sustainably for something progressive, that company would also be able to capture market share. Adjusting for this is where growth can be found, independent of specific needs such as achieving any specific UN SDGs.
For sustainability-related growth, there are different approaches that can be taken. First, addressing specific issues that can be associated with climate or social impact, changes and needs, for example, addressing the demand for renewable energy or social housing. So, this would mean your organisation will be entering a new market and growth can thus be achieved by offering a more progressive product when it comes to sustainability. This can result in market share growth.
There is also the ability to do something altogether new, such as creating a new market or changing the rules of the game. Most companies work in the extract, produce, consume and dispose economy. One can achieve the same production and consumption simply by replacing extraction and disposal into circularity.
Circularity limits the production of waste and instead focuses on the continual use of resources in a more regenerative approach. This can include reusing, repairing and remanufacturing to retain the functional value of the product. With efficiencies gained through such an approach, one may both create and therefore enter a new market for the same product while growing market share. Two birds with one stone, however, requires far more dedication to make happen.
Capital and its new nature
Now, coming back to capital or, rather, the change in the nature of capital. Existing businesses need to be able to access the most competitive types of capital — a well-known truism. But what is happening for equity and debt globally, and will every organisation be able to access it effectively? Investments & Pensions Europe (IPE) notes that, in 2018, the top 400 asset managers controlled more than US$65 trillion of equity and debt assets globally.
These investors, for the most part, are universally invested. This means they have so much to invest that they need to be invested in significant parts of the economy. It also means they cannot diversify away the impact of climate and social issues from their portfolio. The planet Mars is not offering opportunities that give the required internal rate of return, unfortunately. As such, these asset managers need to be part of the change in addressing climate and social issues and will increasingly show bias to invest in invested assets.
Whatever the stage of progress, it is not hard to find the movement. We can see the movements in equity, with the outperformance of 51 out of 57 global sustainable indices against their broad market counterparts during the depth of the recent market volatilities. In the debt space, we see that the green, social and sustainability (GSS) global bond market rose to US$321 billion in 2019, which was a 52% increase from 2018.
Finally, we see movement in banking capital, influenced by banks such as HSBC, which is leading globally in the Sustainable Finance Awards (we have been named “World’s Best Bank for Sustainable Finance” by Euromoney for two consecutive years and, in Malaysia, HSBC Amanah has been named Islamic ESG Bank of the Year by the Asset Triple A (Islamic Finance) and regulators that are joining the Network for Greening the Financial System.
Across the globe, we also see regulators setting up green and sustainability committees. For example, in Malaysia, we have the Joint Committee on Climate Change (JC3) by Bank Negara Malaysia, a platform for financial regulators and financial institutions in Malaysia to collaborate to further understand climate risks and develop relevant tools to effectively respond to those risks.
All these committees will have similar themes such as a taxonomy or classification framework, which alone will cause a direct or indirect bias on where to extend financing. In addition, where adherence to a taxonomy is proven to give greater financial stability, there will be an additional incentive for banks to point more financing to be compliant with the taxonomy.
In summary, sustainability can be a growth driver for your organisation. In fact, one of the biggest initiatives we are taking is HSBC Amanah’s Project Cocoon, an initiative to become the HSBC Group’s first sustainable banking entity by end-2022 and to establish a mainstream commercial bank that is sustainable.
Growth opportunities are abundant when it comes to sustainability, not just in the popular places but intrinsically from product innovation and innovating for sustainability. In addition, access to capital is being heavily influenced by sustainability factors across both public and private and equity and debt markets.
Oz Ahmed is CEO of HSBC Amanah Malaysia Bhd. This column is part of a series coordinated by Climate Governance Malaysia, the national chapter of the World Economic Forum’s Climate Governance Initiative. The CGI is an effort to support boards of directors as they discharge their duty of care as long-term stewards of the companies they oversee, specifically to ensure that climate risks and opportunities are adequately addressed.