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Posts tagged 'investment'

Time to look at product portfolios from the sustainability perspective?

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More and more companies are measuring the environmental impact of their products holistically, through life cycle analysis, and as a result many are making significant changes to the products they sell. There is also a movement towards measuring natural capital in order to have the full account of companies and products. These are great steps in the right direction towards product sustainability. But it’s one thing to make more socially and environmentally friendly products and services available; quite another to get customers to buy these instead of less sustainable options that are often cheaper or more familiar.

What’s the point in a company developing a AAA-rated eco-product that only sells in small quantities while its far more environmentally damaging B-rated product is still on the market and sells 50 times as many units?

It’s often been argued that as long as companies give consumers a choice, then it’s down to the consumers to make the ‘right’ decision. But experience tells us that we can’t rely on consumers to do this. Survey after survey demonstrates that consumers habitually claim they will take social and environmental issues into account when buying goods and services, but sales figures show that these good intentions are often forgotten by the time they get to the checkout.

The ‘ethical consumer’ does exist, but only in small numbers.

product portfolio from the sustainability perspective

This is why governments are increasingly stepping in to edit the choices that consumers are given, by creating rules of the game that favour a transition towards more sustainable products. Often this means cutting out the worst offenders in the market either by directly banning certain products or by setting a minimum standard – as with European measures on incandescent light bulbs or the REACH regulations on chemicals. However, such initiatives only cut out the end tail of the curve.

Governments can also facilitate the adoption of the best products, for example by committing to buy them in their public purchasing programmes. That increases the length of the tail at the other end. Even more interesting is when governments try to push the whole curve towards the right, for example by setting up tax incentives and penalties designed to promote the sale of more sustainable products. The bonus-malus tax on cars in France and the company car taxation scheme in the UK are examples of this. But sometimes just the creation of a legal requirement for labelling of the sustainability performance of products can do the trick. The EU labelling laws on white goods have been successfully pushing consumers towards AAA rated products for a long time.

We should not always, however, be waiting on governments to show the way.

It’s up to companies as well. Businesses that want to push the sustainability agenda cannot be content to delegate leadership to the government or consumers. After all, the ultimate sustainability brief of a company is to drive its entire portfolio towards its most sustainable products. The first step towards doing this is to introduce more sustainable products into a company’s portfolio, which can be a significant feat in itself for some types of products. But the next step is to manage that portfolio by editing consumer choice. That means removing more damaging products and services from the market while progressively convincing customers to buy the more sustainable ones. Unfortunately this idea of companies managing their entire portfolio is hardly heard in the current sustainability debate.

Who can push for portfolio management?

The most obvious actors who can push for portfolio management are the companies manufacturing and supplying products and services, and the retailers who sell them. Either party can lead the way. If retailers show little interest in changing what they sell, then supply companies can force them into it by default by managing their own portfolios and therefore changing what they are offering for sale. But if supply companies are dragging their heels, then retailers can galvanise them into action by refusing to stock certain products. Ideally both parties will take an active role in sustainable portfolio management, with retailers finding that companies are increasingly providing them only with products that have lower impacts, and retailers increasingly deciding to inform companies that they will not stock certain higher impact items.

Corporate portfolio management

If a company is serious about reducing its life cycle impacts, firstly it has to create products with lower impacts and secondly it needs to sell more of those products and less of those with a higher impact. Put simply, it must sell more of the good stuff and less of the bad. Sometimes the damaging effects of a product are clear and immediate. For example, a number of chemical companies, including Henkel, have adopted a socially responsible stance by removing ingredients such as toluene from adhesive products that can be misused by solvent abusers. And of course they then don’t then leave the ‘bad stuff’ on the market – that would defeat the purpose.

Taking such affirmative action usually protects a company’s reputation, prepares it for future legislation and can give them a commercial advantage in some markets. Of course it’s good if a company starts, in this way, to sell more sustainable products. But we need to understand how a business’s entire portfolio behaves. Even if sales of good products do very well, it’s no good if sales of bad products are continuing to increase at the same time.

A popular eco-products story has been GE’s ecoimagination – the drive to increase GE’s portfolio on technologies for sustainability, such as wind turbines or efficiency solutions for buildings. GE announced revenue goals for these technologies when it launched ecoimagination. But it also had goals for advancing the sales of other, less desirable technologies – such as piping materials for the oil and gas industries. So it’s not clear whether the average footprint of GE’s entire portfolio will decrease over time.

Another high profile eco-products story has been Philips’ Ecovision, under which they have set themselves a 2015 target of a 50% energy efficiency improvement for their average total product portfolio compared to 2009. This is a much better approach. Showing improvements in sustainability performance of the whole portfolio in this way will be a must for companies in the future. And it won’t be as difficult to achieve as at fist it might sound. At Interface Europe we managed to cut our average product carbon footprint by 27% in just four years from 2008 to 2012.

Retailer portfolio management

Any life cycle analysis carried out by a retailer will reveal that the biggest impacts of its activities are not in its own operations – the running of its stores – but in the embedded footprint of the goods and services it sells. A supermarket can make its lighting and its refrigeration as energy efficient as possible, but it’s the stuff that it puts on the shelves that makes the real difference. This means that to make any significant difference to environmental impacts, retailers must take on some accountability for what they are selling – by making sure they don’t sell the really bad stuff, by pushing their suppliers to give them more sustainable products, and by encouraging customers to buy them. The pre-requisite for this kind of portfolio management – or ‘choice editing’ – is for retailers to demand Environmental Product Declarations (EPDs) from their suppliers for each product they sell.

Because these EPDs are based on life cycle analyses, they allow products to be compared in a meaningful way. But you don’t need full EPDs to see the bigger picture. After all, it’s no good fiddling about at the margins to produce small gains when you can make much more significant progress at the core. According to Tesco, for instance, the carbon footprint of a class 1 carrot is 80g CO2 per 100g of serving, while the impact of a Scottish carrot is 84g. Who cares about that difference when the footprint of a 100g serving of beef is a massive 1,000g CO2? Surely Tesco should be trying to encourage people to eat less beef and more carrots?. And for that matter, shouldn’t they be helping us to shift from high fat, high sugar diets to healthier options? Those shifts should, arguably, should be at the core of a supermarket’s environmental and social responsibilities.

Choice editing can be easy

It’s actually very simple for retailers to begin choice editing. The UK do-it-yourself retailer B&Q has seen this, and it has already begun to edit its product portfolio on sustainability grounds. For example, after life cycle analyses showed the extreme energy inefficiency of patio heaters, it simply took the decision not to sell them any longer. It may have lost some short–term income by withdrawing patio heaters, but it also gained many plaudits. However, in the words of the UK Sustainable Development Council, choice editing is not just about cutting out unnecessarily damaging products; it’s also about ‘getting real sustainable choices on the shelves’.

Providing such choices doesn’t have to be about bringing completely new products to the customer – it can be about making sure the best products are the only ones available. A number of UK supermarkets now stock 100% fairtrade bananas, so customers who want to buy bananas have no choice but to buy fairtrade. The same happened over a number of years with FSC-certified wood, to the point where it has now it’s become European law to stock only such material.

There are plenty of other areas where retailers can show strong, positive leadership. What excuse is there, for instance, for a retailer to be selling anything other than electrical appliances with A+++ energy efficiency ratings? If Walmart decided only to stock the most energy efficient A+++ appliances tomorrow, imagine what difference that would make to the thinking of manufacturers who are its suppliers – and to Walmart’s overall footprint. It would also make it easier for governments to ban all rating categories but the most efficient ones.

But portfolio management is also about what you don’t yet sell. If supermarkets have expanded to adjacent markets such as mobile phone contracts or motor insurance, then surely they can expand into products that are solutions to social or environmental challenges? IKEA, for instance, has just become the first large retail chain to start selling solar panels – with the express purpose of trying to transform consumers’ attitudes to energy (as well as making money). With the same aims in mind, Sainsbury’s is providing loft and cavity wall insulation to customers, as well as solar panel installations.

Asset portfolio management

Portfolio management isn’t just about products and retailers; they are just the most obvious examples. A similar model can be applied to services, and indeed investment and asset management. Many asset managers already edit their investment portfolios by avoiding controversial investments in companies that manufacture cluster munitions, for example. Apart from specific ethical investors, the list of ‘no go’ areas remains pretty limited for most mainstream investors, but this model could be extended to a less black and white approach, actively promoting more sustainable investments and choosing not to invest in less sustainable activities. For assets such as property, for instance, the environmental options are very clear.

Where do we go from here?

None of this is rocket science – we just need the willpower. But it does mean changing mindsets: moving away from measuring performance at corporate level to measuring the company’s entire portfolio on a life cycle analysis basis. And it means shifting from the idea of producing a few high-profile green products designed to catch the public’s eye and towards mainstreaming of those green products. It also means taking on the moral responsibility of trying to influence the behaviour of consumers.

To help us on our way, we must remember that this kind of portfolio management already goes on all the time. Companies change their product ranges continually; they drop old models and bring in new ones. Department stores choose to put 15 different types of kettle on sale, not the full range of 515 available to them. So the only radical thing about sustainability portfolio management is the ‘sustainability’ part. That’s what we need to get to grips with, and the quicker we do so, the more dramatic will be the results.

Of course there are some potential pitfalls, but these are not insurmountable. If retailers or manufacturers are earning lots of money by selling or making higher impact products, then they need to be careful about how they make the switch. When Iceland, the UK frozen food retailer, tried to move overnight to selling organic food, large numbers of its customers walked away – and it had to reverse its decision. But the lesson here is not that portfolio management doesn’t work – it’s that it has to be carefully managed. Companies and retailers should know their customers and introduce changes over a period of time, helping to educate them about what they’re doing and using all the marketing resources at their disposal.

Key to all this will be transparency of environmental performance, which will help consumers choose products on sustainability factors. People used to buy light bulbs based on wattage; now, increasingly, they are buying them on energy performance. That switch has been achieved by good labelling and by good education. Some of changes will be driven by regulation, others by B2B demand, some by companies and retailers themselves, competing against each other. But the sustainability movement as a whole needs to push in that direction. It provides fertile ground on which to compete, and that is what companies love.

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Investors call for 2030 Decarbonisation Target – Letter to George Osborne

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The Aldersgate Group and UKSIF delivered this letter to the Chancellor at the end of September.

It was signed by investors responsible for over a £trillion investment worldwide and called for a decarbonisation target to be included in the Energy Bill.

It argued that the lack of a target inhibits investment decisions and negatively impacts the UK’s ability to attract the capital needed to update its ageing infrastructure. It received coverage in the TelegraphIndependent and Business Green.

Click on the image for the full PDF:

Investor letter to George Osborne

Here is the PDF content as text:

Dear Mr Osborne,

Re: Investors call for 2030 Decarbonisation Target

We welcome the Coalition Government’s commitment to reform the UK’s energy market and attract around £110 billion of capital investment to upgrade its electricity infrastructure over the next decade. This has the potential to secure the investment needed to deliver the reliable, diverse and low carbon technology mix that the UK needs to ensure a sustainable economic recovery.

As investors, we recognise the threat that climate change represents and many in our sector are tailoring investments accordingly. A recent survey by the Global Investor Coalition on Climate Change found that 70% of asset owners said climate change factors influenced their fund manager decisions in 20121.

Increasingly, the UK’s economic growth, competitive advantage and the health of the job market will be determined by our response to climate change, energy security and commodity price volatility. Against this backdrop, it is essential for Government to provide investors with the long-term confidence they need to transform our electricity market and make investment decisions capable of driving wider economic growth.

The lack of a meaningful 2030 decarbonisation target in the Energy Bill is detrimental to this objective – exacerbating policy risk and investor uncertainty. In many cases, this increases the cost of capital and deters major investors, manufacturers and project developers from investing in the UK and creating jobs. For example:

* A PwC report outlines that a 2030 decarbonisation target needs to be set before 2016. To delay the establishment of a target until after the next general election will affect investment decisions being made now

* EY states that the prospect of waiting until 2016, for even the possibility of a 2030 target to be addressed, has “left investors with a sense of uncertainty”1 Global Investor Coalition on Climate Change (August 2013) “Global Investor Survey on Climate Change. 3rd Annual Report on Actions and Progress.”

* 2 PwC (March 2013) Attracting investment in UK renewables – Will the UK succeed?

* 3 EY press release, 26th February 2013, “Once in a generation” Energy Bill falls short of expectations, EY finds.

* A Renewable Energy Association survey of leading UK low carbon companies shows that a “2030 target in the Energy Bill is seen as of major significance, and its absence is undermining confidence in investment in renewable energy and its supply chains”

* A statement by The UK Energy Research Centre (UKERC) argues that: “The absence of a 2030 decarbonisation target in the Bill may not persuade investors of the need for new manufacturing assets in the UK, as there is a risk that these could be stranded after 2020 once the current targets have been met”Support for a decarbonisation target is widespread, as demonstrated when an alliance of over 50 of the UK’s largest businesses and industry bodies wrote to you last October, calling for a 2030 carbon target for the power sector.

The signatories to this letter support the amendments to the Energy Bill, tabled at grand committee by the Lord Oxburgh KBE and expected to be retabled imminently for report stage, which require the inclusion of a 2030 carbon intensity target for the energy sector to be set in 2014 for implementation by 2030. These amendments are in line with recommendations made by the independent Committee on Climate Change, which has identified the least-cost pathway to decarbonisation by 2050 and one which could trigger significant growth opportunities for the UK.

Cc Rt Hon David Cameron MP, Rt Hon Nick Clegg MP, Rt Hon Ed Davey MP, Rt Hon Vince Cable MP, Rt Hon William Hague MP, Rt Hon Danny Alexander MP, Rt Hon Michael Fallon MP, Rt Hon Sajid Javid MP, Lord Deben (Chair of the Committee on Climate Change), John Cridland (Director General of the CBI).


Signed by:

Peter Young
Chairman, Aldersgate Group

Peter Michaelis
Head of SRI, Alliance Trust

Stephen Mahon
Director, Armstrong Energy

Steve Waygood
Chief Responsible Investment Officer Aviva Investors

Matt Hale
Managing Director, Environment Executive, Europe and Emerging Markets (ex-Asia)
Bank of America Merrill Lynch

Michael Quicke
Chief Executive, CCLA Investment Management Limited

Bill Seddon
Chief Executive, Central Finance Board of the Methodist Church and Epworth Investment Management

James Cameron
Chairman, Climate Change Capital

Simon Shaw
Chairman, EEA Fund Management Ltd

Sue Round
Director of Investments, Ecclesiastical Investment Management

Paul Ellis, Chief Executive Ecology Building Society

Ben Warren Partner, EY

Peter Dickson
Partner / Technical Director, Glennmont Partners

Colin Melvin
CEO, Hermes EOS

Ian Simms
Chief Executive
Impax Asset Management

John David, Investment Director Rathbone Greenbank Investment

Susan Seymour
Trustee, Chair of Joseph Rowntree Charitable Trust Investment Committee

Sacha Sadan
Director of Corporate Governance Legal & General Investment Management

Gareth Derbyshire
Chairman of the Investment Committee and Trustee Director M&S Pension Trust Investments

Adam Bruce
Global Head of Corporate Affairs Mainstream Renewable Power

James Perry, CEO Panahpur

Natasha Landell-Mills
Head of ESG, Sarasin & Partners LLP

Peter Harrison
Global Head of Equities, Schroders

Catherine Howarth CEO, ShareAction

Iain Richards, Head of Governance and Responsible Investment Threadneedle Investments

James Vaccaro
Head of Market & Corporate Development, Triodos Bank NV

Dr Richard Mattison
Chief Executive Officer, Trucost

Ben Goldsmith
Partner, WHEB Partners Simon Howard

Chief Executive, UK Sustainable Investment and Finance Association (UKSIF)

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