SUSTAINABLE BUSINESS REVIEW
GREEN FINANCE • INNOVATION • ECONOMICS
Mirror, Mirror on the Wall, Who's the Least Sustainable of Them All?
ECONOMICS What the Decline of the Horse Has to Tell Us About the Future of Energy
TECHNOLOGY & INNOVATION The 'Yes, But' Culture Will Not Save The World - A Roosegaarde Approach to Sustainability
GREEN FINANCE What Will it Take For Investors to Go Green?
IN COLLABORATION WITH
About us The Sustainable Business Review is the UK's first student-led quarterly magazine producing thought-provoking opinion pieces around green finance, environmental economics and innovation. We aim to bridge the gap between corporates and students when discussing sustainability, and want to inspire the next generation of environmentally-driven leaders. We are a team of economists, engineers and business students, and we hope that you find our content insightful and it equips you with the knowledge to help gain a new perspective on our world.
Lead Editors
Professional Guests
Committee
Janina Gleed Economics Lead Rebecca Harrison Innovation Lead Grace De Bohun Finance Lead Jamie Alexander Finance Lead
Sharon Darcy Director at Sustainability First Deirdre Cooper Co-Head of Thematic Equity at Ninety One Sneha Shah Head of Communications at Recycleye
Abdur Choudhury President Nathan Howell Vice President Laura Loboda Marketing Director Shabbir Farooqi Treasurer Asim Ali Sponsorship Director
Special thanks to Azizul Khan
Economics Authors
Innovation Authors
Finance Authors
Mihir Shah Dominique Gomez Sania Zaffer Jack Roycroft-Sherry Advait Vaidya
Maxine Miller Rachel Irwin Federico Scolari
Ed Cox Sebastian Thomas Luke Parsons Vasilios Kyriacou
About Green Finance Discover the world of ESG, corporates and financial markets all in one place. We aim to discuss topics such as green bonds, equities, global relations, company initiatives and investing.
About Innovation
About Economics
Unearth the link between the low Explore the interplay between carbon economy and innovations in economic theory and the technology. We aim to discuss topics environment. We aim to discuss such as renewable energy, deep topics such as inequality, sustainable tech, agriculture, infrastructure and growth, developing economies, and Contact us to have your firm featured on our magazine. fashion. government policies.
ABOUT | 1
Contents
Sustainable Business Review Issue 4
Economics 3 7 10 14 16 18
On the cover Our cover page considers the issues within the beauty industry and the sheer volume of waste it produces. Various technologies now exist to solve this issue, but there are doubts as to whether this will be enough due to the ubiquity of single-use plastic within the industry’s supply chains.
The future of energy Exploring the use of big data to revolutionise data collection and analysis, as well as the policy benefits this could create, page 8. An entrepreneurial solution Dan Roosegaarde’s firm adopts a unique approach in ensuring innovation can prevail, page 22. Investors switching gears Investors remain cautious about backing infant industries due to experiences such as the dotcom bubble – how can regulators encourage investors to go green, page 34.
What The Decline of The Horse Has to Tell Us About The Future of Energy Changing Stakeholder Engagement Within Utilities - Interview with Sharon Darcy Saving Aviation: The Future of Green Airlines Big Data: The Key to Future Sustainable Development Reconstructing Sustainability Objectives PostPandemic Why The Economics of Biodiversity is Different
Innovation 22 The 'Yes, But' Culture Will Not Save the World - A Roosegaarde Approach to Sustainability 24 Revolutionising the Waste Management Industry - Interview with Sneha Shah 27 Cleansing the Beauty Industry of Single-Use Plastic 30 The Largest Incentive Prize In History
Green Finance 34 What Will It Take For Investors to Go Green? 37 Sustainable Investing at Ninety One Interview with Deirdre Cooper 40 Venture Capital: ESG-Practical or Unfortunately Impractical 43 Are We In A Green Bubble and Does It Matter? 45 ESG and M&A - The Real Value
Q&A with Sharon Darcy
Q&A with Sneha Shah
Page 7
Page 24
Q&A with Deirdre Cooper
Page 37
@nottinghamgesoc
www.linkedin.com/company/nottsges nottinghamgesoc@gmail.com
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ECONOMICS
The Future of Energy
What The Decline of The Horse Has to Tell Us About The Future of Energy by Jack Roycroft-Sherry
ALSO IN THIS SECTION
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Reconstructing Sustainability Objectives Post-Pandemic
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Why The Economics of Biodiversity is Different
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What the Decline of the Horse has to Tell Us About the Future of Energy By Jack Roycroft-Sherry It is easy to forget the past significance the horse once had in everyday life given the equine sparsity of our modern age. However, the horse as a power generator and economic machine was once pervasive. In that sense, the horse was much like crude oil today. The symmetries between the two, however, only begin there. They were both once pivotal for modern economic growth. In addition, they both produced intolerable externalities: global warming inducing emissions, and manure, flies and corpses respectively. Furthermore, both were extremely versatile: oil can be used for producing power, plastics, and clothing, whilst the horse powered mechanical machines, transported people and heavy freight, and was used in farming and policing (McShane and Tarr, 2011). An analogy between the two might thus offer perceptive insights into the future of oil and energy. Few at the time expected the horse, a contemporary ubiquity of city life, to fall into obsolescence. Though oil is as yet indispensable, this may not always be the case. History suggests that, although renewables seem poised to replace it, oil is likely to retain many uses. Moving goods short distances, for example, was the domain of the horse until as late as the 1930s (McShane and Tarr, 2011). Oil-derived fuels could conceivably remain a necessity in jet travel or heavy industry for many years to come (Pooler, 2021). It is also plausible that oil will prove a crucial energy source for select, renewable-energy-incompatible regions far into the future; moreover, perhaps they will always be a useful backup source of energy provision. And though there exist renewable alternatives, many oil-derived plastics may not be easily gotten rid of. The economic activity that is sustained by the oil industry is, at present, colossal. The sector supports exploration companies that seek out new reserves, oil refiners, infrastructure servicers and drilling companies. That is just to name those directly reliant on oil - many more are supported indirectly.
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Equally numerous, were the ancillary industries required to sustain the horse. Growing hay and oats for horses generated income for millions of farmers, while the transport and sale of these agricultural products provided further employment (McShane and Tarr, 2011). The horse economy demanded manufactured goods too, including harnesses, blankets and shoes, providing jobs for teamsters, blacksmiths and stable hands (McShane and Tarr, 2011). Most of these industries were deeply scarred by the decline of the horse. Oil’s decline is likely to cause a similar hurt. More attention should thus be given to supporting those in oil-related sectors who, at the point when oil does seriously decline, will face terminal threats much like those that supported the horse did a century past. Most inventions take time to bear fruit. It took time for petrol and electric vehicles to become refined and effective enough to overcome the practicality of the horse (McShane and Tarr, 2003). In theory, the use of horsepower should have been obsolete as soon as Watt invented the high-pressure steam engine, yet instead became increasingly common. We should thus expect that more and more technologies within renewable energy will emerge, building on previous innovation. Few expected the costs of wind energy to have declined so drastically as to be increasingly viable without subsidies; hydrogen energy is a hotbed for research and development; and technological breakthroughs could soon make solar panel efficiency surge (Chediak and Eckhouse, 2019) (Belton, 2020). In time, it is not inconceivable that renewables could provide energy at a scale and efficiency that outcompetes what oil and other fossil fuels were ever capable of. The horse had limited scope for improvement: once they were bred, fed and managed as effectively as possible, productivity improvements fizzled out (McShane and Tarr, 2011). Similarly, oil cannot be improved upon. At the time that electric and petrol vehicles began displacing the horse, many were sentimentalizing it; many still adored the horse and feared change (McShane and Tarr, 2011). For others, the horse had come to symbolise the modern age and were loath to see it decline, even though its replacements were surely more advanced. We still measure engine performance by horsepower and truck drivers still call themselves teamsters - both links to an equine past. For all the economic prosperity oil has endowed, let us hope that, unlike the horse, when its time is up we hold no similar nostalgia.
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References Belton, P., 2020. A breakthrough approaches for solar power. [online] BBC News. Available at: <https://www.bbc.com/news/business-51799503> [Accessed 3 March 2021]. Chediak, M. and Eckhouse, B., 2019. Bloomberg: Solar and Wind Power So Cheap They’re Outgrowing Subsidies. [online] Bloomberg.com. Available at: <https://www.bloomberg.com/news/features/2019-09-19/solar-and-wind-power-so-cheap-they-re-outgrowing-subsidies> [Accessed 3 March 2021]. McShane, C. and Tarr, J., 2003. The Decline of the Urban Horse in American Cities. The Journal of Transport History, 24(2), pp.177-198. McShane, C. and Tarr, J., 2011. The horse in the city. Baltimore: Johns Hopkins University Press. Pooler, M., 2021. ‘Green steel’: the race to clean up one of the world’s dirtiest <https://www.ft.com/content/46d4727c-761d-43ee-8084-ee46edba491a> [Accessed 3 March 2021].
industries.
[online]
Ft.com.
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Q&A Sharon Darcy Director at Sustainability First
Sharon Darcy Sustainability First sounds like an amazing charity and Think Tank. Can you tell us a bit more about it and your career path to becoming its Director? Our main focus is on how environmental, social and economic issues intersect and how we balance those issues. We have a specific focus on UK utilities, particularly energy and water sectors but we also do work on communications. In terms of my background, at university, I studied politics. After graduating I taught English in China before returning to the UK and working at the National Audit Office in their privatization and regulation department. This was a time when many of the utilities in UK were being privatized so I worked on many value-for-money studies on the privatization of the energy industry. This role gave me an in-depth understanding of the energy value chain, the changes the sector may go through, and the issues involved from a public interest perspective in terms of what people want from the energy sector. Following this, I spent time with consumer organisations looking at issues around public utilities, consumer protection issues and regulatory forms and frameworks. When I had my kids, I had a portfolio career with a variety of board appointments that gave me a solid understanding of risk issues in terms of the long-term interests in infrastructure sectors. Since then I have done a lot of work looking at the public interest in energy transition and how the energy sector needs to change. It is fair to say that until ten years ago the energy sector was pretty much a backwater sector; it wasn’t as dynamic a sector as it is today. The increasing climate crisis and the associated role of the energy sector in the energy transition has really driven this change - so Sustainability First’s
role has gone from being quite niche to much more mainstream. In this field of transforming frameworks for sustainability, what do you particularly enjoy in your role? I have done some in-depth work on innovation in the energy sector, particularly looking at how the energy value chain needs to change from a centralised command-and-control system to being a far more distributed and pluralistic sector where energy can be created by any one of us in our homes, for example with solar panels. What I find particularly interesting is how the energy value chain interfaces with people and communities as there is not only a technical challenge, in terms of decarbonizing the energy sector, but also a massive social challenge in terms of getting widespread behavioural change. This holds true both for consumers and for companies, the latter of which need to go from just selling commodities - i.e. kilowatt hours - to selling energy as a service which presents a range of whole new different options. This intersection of social issues with the decarbonization agenda and technological risks and opportunities is what I find fascinating. From the projects you have been involved in, may you expand on a particularly impactful initiative that you feel lives up to the charity’s mission? Sustainability First’s unique set of skills involves convening different groups of people who need to work on an issue, building consensus and working through the challenges and opportunities in that area. One meaningful example is our work on corporate purpose and public purpose and what they mean in the utilities sectors.
Utilities are going on a big journey from being sellers of commodities to offering people-centered services This change is leading to a more fastmoving, dynamic and pluralistic environment because while companies are changing so are the policy and regulatory frameworks in which these companies operate. And why is this? Before privatization, nobody questioned where these companies got their power and legitimacy from. Since privatization people have more or less accepted the established incumbent players. As the sector moves through technological change and environmental challenges, companies are increasingly thinking about their role in society and how they can build legitimacy. One significant challenge identified around four years ago related to licenses to operate. If you are a company that uses private capital to deliver public value, you need to think carefully about sources of legitimacy. Only when Jeremy Corbyn began talking about nationalization in his agenda for the Labour Party, did utilities wake up to these issues and question where they as monopoly providers of essential services get their legitimacy from. How can they claim to be serving customers when they know lots of customers are in fuel poverty, in debt and there have been terrible examples of service failures? Similarly, many people would say they make excessive profits and are offering their leaders returns and remuneration which are not warranted. The work Sustainability First has done regarding what a license to operate looks like has really helped focus companies on who they should serve. We get them to consider whether they want to be an enduring player in a local community and how to build a relationship with
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Sharon Darcy stakeholders that has enduring value for all. As we were doing this work, the whole debate around ESG really took off in the investment community, turbo-boosted by the global net zero commitments. So, Sustainability First really focuses on translating what ESG and public purpose means in the utilities context, especially for monopoly providers of essential services, and has shifted the debate in these sectors. Evidently, a huge number of discussions with a variety of stakeholders take place to build an effective framework that companies can meaningfully implement. What trends or outcomes surprised you the most from these discussions and the research you have done? One interesting revelation is the pace of change. When we started the project, there was a real reluctance to engage in some of this work, such as the energy price cap, despite the backlash the energy sector has received for terrible prices. Once the government committed to net zero, the need for businesses to address these issues has transformed the debate as people realise this is not a pure technical fix. Companies must now fundamentally think differently around their business models, their relationships with stakeholders and how to get the right sort of investors to support them. The speed at which this change has happened has taken a lot of people by surprise. It shows that in an enduring sector (e.g., providers of heat) where the need in society will never disappear, it is important to understand the fundamental frameworks, particularly in policy and regulation, that will deliver outcomes that are in the long-term public interest. Secondly, the utility sector, particularly regulators, has difficulty in interacting with society as citizens, not just consumers.
Regulation is primarily focused on delivering customer outcomes which are one-off transactional activities. The relationships you have with essential service providers, on the other hand, are typically ongoing enduring relationships, so regulation needs to change to reflect citizens rather than consumers. The implications in terms of how you frame regulations and policy run deep. For example, the Competition and Markets Authority (CMA) identifies customer and consumer harm – it does not consider citizen harm. These are real issues that sit at the heart of some of our problems around sustainability. Could you expand on how businesses look at citizens rather than customers? How can they tell if they are on track to deliver on their intentions? This is a really important issue. In our work on what a license to operate looks like, one of the key focus areas is ongoing stakeholder engagement. In a dynamic, fully competitive market, purchasing decisions provide information about individual needs, preferences, and price points. In many utilities markets you do not get this kind of information so companies must develop other mechanisms to engage their stakeholders such as by increasingly connecting with them as active participants of services, rather than passive recipients. The only way we will be able to deliver net zero is if we have significant behaviour change in our lives. Therefore, to get stakeholders to change their behaviours, companies must focus on treating customers as members of acommunity and build long-term relationships with them, particularly if a company is a monopoly provider in an area. This means thinking about what long-term partnerships are needed and how to deliver co-benefits that benefit multiple parties. A lot of
economic regulation and policy does not support this activity, so we need a fundamental shift in policy and regulatory frameworks to support this type of engagement. It is also vital that we become fully inclusive across the population. The standard profile of many leaders is that of an older, white male – there are no female CEO leaders in the energy sector. This is shocking. We all know diversity is massively important on multiple fronts, not just gender diversity or ethnic diversity but diversity in thinking. If utilities are going to be trusted providers of essential services, they need to engage a far wider range of stakeholders because these people will be the individuals changing behaviours in households and in society and bringing new ideas and visions for change. If we don’t engage with these wider populations, we won’t get good ideas that will make us more secure and resilient for the future. With the landscape changing so rapidly, how has this impacted Sustainability First’s strategy in the near and long term? The area we work in is far more vibrant, lively and busy than it used to be as many more people take an active interest in the sector. Research shows there is a significant societal shift in that many young people wish to work with organisations who can show their ESG credentials. What we want to do as Sustainability First in this context is build much stronger relationships with a wider range of stakeholders so that we can use our in-depth knowledge to connect with the wider society, particularly younger people, and emphasise that if we are going to solve these issues, we need your best ideas, your best visions, your best involvement! In that sense, we see ourselves as a translator for the wider world of the deep technical issues that we are working on.
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Saving Aviation:
The Future of Green Airlines By Renee Gomez
Before Covid-19, airlines would host around 100,000 flights per day (ICAO, 2020) (Photo: Sabre)
The Runway It shouldn’t be an overstatement to say that the airline industry has changed the world. Allowing people to transport themselves, or their cargo, to anywhere across the globe is an ability so powerful that it’s hard to imagine our modern world without it. Yet, for a moment, we had to. The Covid-19 pandemic left the industry struggling for survival, with the International Air Transport Association, or IATA, reporting a 90% decrease in passenger air transport year-on-year in April 2020 (measured in ‘revenue passenger kilometre’) (OECD, 2020). Equally troubling was freight transport, similarly down by 30% in the same time period, and the endless stream of bad news from major industry players such as Airbus, Ryanair, and EasyJet.
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Many observers are wondering what the airline industry will look like in the near future. But then again, this isn’t a new phenomenon. Sustainability has been a pressing issue in the airline sector for a while now, and not without reason. To the industry’s credit, many major players have taken notice and are pushing a transition towards sustainability – alternate fuels, energy efficiency, and other disruptions. But, unsurprisingly, the path towards progress has been roadblocked, leaving many questioning what comes next. The theme of 2021 seems to be to ‘build back better’. The airline industry could be a phoenix, rising from the ashes of Covid-19 induced devastation and flying towards a greener, brighter future – but what will it take to get there?
The pandemic has caused demand for flights to plummet globally (Photo: BBC)
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ECONOMICS The Crash To even begin to answer this question, it’s helpful to look at the scale of the havoc wrecked by the pandemic on the airline industry. News headlines and official statistics regarding it have been a long tale of woe; according to Statista (2020), there’s was a $314 billion loss in revenues in 2020, a trend that’s likely to continue this year. Health anxiety has meant that 41% of potential passengers will travel less over the next 18 months – bad news for an industry that’s seen its annual air passengers fall from 4.5 billion in 2019 to 1.8 billion currently (UN, 2021). Looking deeper, the impact of the pandemic can be broken up into three time periods: the short, medium, and long term. In the short term, with tanking revenues and mass bankruptcies – around 43 airlines by 8th October 2020 (CNBC, 2020) making enough money to survive global lockdowns is the primary goal. *Additionally, following downsizing airplane fleets and the loss of more than 200,000 jobs globally (Bloomberg, 2020), limited capacity will force a rethink of whether to allocate resources. These struggles are compounded by a theme of uncertainty in the medium term, mainly regarding how governments go about easing restrictions, and how much wary customers will demand travel. Predictions surrounding ‘proof of vaccination’ requirements to fly, and a summer boom in demand are only that: predictions. And the view does not get any less murky in the long term. Structural changes may be coming to the airline industry; business flights – the revenue backbone of the sector - look set to be made obsolete by the now ubiquitous
Zoom meeting. Competition may go into a tailspin, as the surviving airlines could increase prices on less serviced routes, harming low-income customers. As one can imagine, the route to recovery and clarity will be slow and arduous. The IATA (2020) predicts – optimistically that passenger numbers will return to pre-pandemic levels by 2023; other sources suggest 2024 or 2025. Critically, this can only be achieved with the help of unprecedented levels of government support, creating a link between the airline industry’s recovery and its attempts at sustainability.
be a wonder of innovation – but definitely won’t come cheaply, or quickly. Of course, a simple, obvious way to cut emissions would be to simply stop flying. The world has gotten a taste of this throughout the pandemic, and with industry heavyweights downsizing and ‘flying shaming’ becoming commonplace by influencers like Greta Thunberg, it might just catch on. ‘Might’ is an inadequate word when reducing climate change however, and around 80% of airline CO2 emissions are made by flights of over 1,500km (ATAG, 2020) for which there are no
Hydrogen powered fuel cells could be the jet fuel of the future (Photo: Airbus)
The Green Flight Path The danger of airline GHG emissions isn’t their size, but rather their acceleration. Whilst commercial flights make up ‘only’ around 2.5% of global emissions, they could be responsible for 22% of CO2 emissions by 2050 (The Guardian, 2021). Even worse, they’re hard to halt; unlike most other forms of transport, there are no clear zero-emission alternatives. This means that decarbonizing the airline industry will
alternative transport methods. Clearly, flying will be here to stay for a while longer, which begs the question: what are the other options? The most promising disruption is alternative power sources, in particular biofuels and electrification. Daring companies such as ZeroAvia have been experimenting with hydrogen-fuelled electric batteries to power light aircrafts, with moderate
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ECONOMICS success so far. Hydrogen is attractive because it packs three times more energy per kilogram than kerosene (the standard-issue jet fuel) and produces only water vapour after burning. However, hydrogen power is far from commercially viable, being incredibly expensive and requiring renewable energy powered extraction methods, as well as extensive redesigns of current aircrafts. Biofuels are more immediately available as ‘drop-in’ fuels to be used in conventional engines, but equally suffer from high costs. Making the shift to alternative fuels will require time and resources – two things that the airline industry currently doesn’t have. While industry titans have pledged to help halve emissions by 2050 – notably, Airbus is working to create the first zeroemission aircraft by 2035 (Our World In Data, 2020) – the pandemic has meant that priorities have shifted elsewhere. It’s clear that it is up to governments to realign incentives and provide key investment to allow the airline industry to not just survive, but to thrive. The Take-off Both the issues of sustainability and post-pandemic recovery circle back around to one solution: intensive government support. This is unsurprising considering the industry’s legacy in leaning on public funds during trying times, and the pandemic has been no different. Approximately €42.8 billion (Transport & Environment, 2020) has been spent to bail out European airlines so far, a figure that is bound to increase as demand rises. Worryingly however, none of these bailout packages have had any environmental regulations attached to them – this
Billions has been spent bailing out airlines – but is this the best way? (Photo: Adweek)
needs to change. Throwing money at airlines and hoping that some will be spent on sustainability goals won’t solve anything. The governments of the world need to be strategic, in three key ways. Firstly, they need to realise that allowing economic activity to drop overall is not a wholly bad thing. By letting substitutes to airline flights gain traction, and promoting efficiency and competition in surviving airlines, governments can reduce emissions and safeguard the industry’s future all at once. Secondly, in environmental policy, governments need to be leaders. Efforts by industry groups such as the International Civil Aviation Organization, or ICAO, have been inadequate; in particular, ICAO’s reliance on carbon offsets (as opposed to reductions) and lax participation have meant that progress on targets has been slow.
economic scale, this rating means that we are on track to raise global warming by at least 4°C – an apocalyptic result. In truth, building back the airline industry on a greener foundation is not merely a lofty goal but an urgent necessity, one that only policymakers can fulfil.
Finally, governments need to be fast. According to the Climate Action Tracker (2020), the sector’s current carbon neutral growth is rated ‘critically insufficient’. On a global
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ECONOMICS References Bloomberg.com. 2021. [online] Available at: [Accessed 15 February 2021]. Climateactiontracker.org. 2021. International Aviation | Climate Action Tracker. [online] Available at: [Accessed 12 February 2021]. CNBC. 2021. [online] Available at: [Accessed 19 February 2021]. Iata.org. 2021. Recovery Delayed as International Travel Remains Locked Down. [online] Available at: [Accessed 19 February 2021] . Oecd.org. 2021. [online] Available at: [Accessed 17 February 2021]. Our World in Data. 2021. Climate change and flying: what share of global CO2 emissions come from aviation?. [online] Available at: [Accessed 16 February 2021]. Atag.org. 2021. Facts & figures. [online] Available at: [Accessed 12 March 2021]. Statista. 2021. Topic: Coronavirus: impact on the aviation industry worldwide. [online] Available at: [Accessed 14 February 2021]. The Guardian. 2021. Boeing says it will make planes able to fly on 100% biofuel by 2030. [online] Available at: [Accessed 18 February 2021]. tTe Guardian. 2021. Large variation found in airlines' CO2 emissions. [online] Available at: [Accessed 13 February 2021]. Transportenvironment.org. 2021. Bailout tracker | Transport & Environment. [online] Available at: [Accessed 13 February 2021]. UN News. 2021. Air travel down 60 per cent, as airline industry losses top $370 billion: ICAO. [online] Available at: [Accessed 17 February 2021].
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BIG DATA: THE KEY TO FUTURE SUSTAINABLE DEVELOPMENT BIG DATA CAN QUANTIFY PREVIOUSLY UNQUANTIFIABLE MEASURES, WHICH ALLOWS US TO ENSURE FUTURE DEVELOPMENT IS SUSTAINABLE. THE REAL CHALLENGE IS GETTING THE TECHNOLOGY INTO EVERYONE’S HANDS, SO SUSTAINABLE DEVELOPMENT IS ACHIEVABLE FOR ALL.
By Mihir Shah Sustainable development is a complex topic, as both its qualitative and quantitative aspects are so difficult to measure. This is where Big Data can step in. According to Oracle, Big Data revolves around large, complex data sets which cannot be managed by traditional processing software. This data, however, provides deeper insights, which makes it all the more important (What Is Big Data? | Oracle United Kingdom, 2021). Big Data and machine learning allow us to analyse and evaluate large amounts of data, quantifying previously unquantifiable information, and ultimately keep track of sustainabilitylinked measurements. That being said, this technology is not readily available and falls foul of privacy concerns, therefore limiting its current scope. Therefore, the biggest challenge of sustainable development is monetising social, environmental, and governmental impacts of a firm. To tackle this issue, we must make Big Data accessible across the world. The sheer volume of data, of which much is incomplete, have made machine learning and AI a key tool in valuing externalities caused by firms, which is the only way we can hold them accountable. Quantifying Actions One of the biggest flaws of current sustainable development measures, such as national surveys, is that they fail to detect true trends that would enable policy makers to push towards sustainable development more efficiently. Cohen and Kharas analyse the potential of Big Data, as they recognise Big Data’s ability to revolutionise data collection, data analysis, and how data is used (Cohen and Kharas, 2018). In particular, Big Data gives the stock market the ability to evaluate a
company's ESG performance in the same way they would analyse financial performance. For example, as outlined in an article in the FT, Pavan Sukhdev launched a platform which calculated the monetary impact of non-financial externalities for firms (Balch, 2021). Investors can use this information when deciding which companies to choose, given sustainable investing has become not only more popular but also more important over the past few years. Furthermore, Big Data has the ability to conduct real-time data analysis, recognising patterns and learning from data, which gives policymakers the ability to make better, more informed decisions. In comparison, national surveys are often low quality or contain data gaps, therefore meaning policymakers must make decisions based on limited information. Big Data can change this situation in a major way; however, it faces large challenges that must first be overcome if it is to become viable.
Figure 1: How data science and analytics can contribute to sustainable development
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Infrastructure Deficits One of the biggest challenges to Big Data currently is accessibility. The technology is relatively new and only available to those with the right infrastructure. Despite the potential of Big Data, AI, and machine learning, there are currently no systems in place that would maximise their utility. Therefore, if we want to take advantage of them this must be addressed. In particular, this issue must be combated in developing countries. The UN has created an infographic, as seen in Figure 1, regarding the impact Big Data can have on the SDGs. For example, analysing spending patterns or price levels in certain areas can help combat poverty and hunger (Big Data for Sustainable Development, n.d.). Therefore, if infrastructure is improved across the board, countries from around the world can benefit. The Decisive Factor: Privacy The biggest challenge Big Data faces is privacy. Big Data can use phones and computers to gain sensitive personal information. For many, this is concerning. Furthermore, Big Tech has become increasingly scrutinised over the past year, with legal action being taken against firms like Facebook for their misuse of data. Therefore, to overcome this challenge, a policy of open data must become the norm. According to the European Data Portal, open data is free to use by all and easily accessible (n.d.). The UN acknowledged this in their 2016 paper titled “Open Data in a Big Data world: challenges and opportunities for sustainable development” (Ebikeme et al., 2016). In the paper, Ebikeme et al. (2016), mentions the capacity of data to affect change from economic growth to climate change. Therefore, it says that open data must become accepted, both within institutions, but also by people
around the world. It is especially important that the acceptance is universal, as the current disparity in infrastructure has already created a significant divide between those capable of taking advantage of Big Data and others, who are completely oblivious. Ebikeme et al. (2016), analyses this issue and claims that both data capacity and infrastructure deficits for low-income and developing countries leaves them lagging behind developed countries. If you add on the privacy issue, these countries could fall even further behind, creating an even larger divide between developed and emerging economies. Although Big Data seems complex/unfathomable, we must attempt to understand and utilise it because it is a technology with the potential to revolutionise how we approach sustainable development. The ability to quantify sustainable development creates an opportunity to create real accountability for countries, corporations, and individuals around the world. But before this can be achieved, we must address the infrastructure deficits and privacy concerns which are holding Big Data back. With a global mindset and the acceptance of an open data policy, Big Data, AI, and machine learning can turn the tides in our favour in the struggle for a sustainable future.
References Balch, O., 2021. Big data helps put numbers on sustainability. [online] Ft.com. Available at: <https://www.ft.com/content/2a405cf6-9592-4de2-960b-4c3e5d0df030> [Accessed 17 February 2021]. Un.org. n.d. Big Data for Sustainable Development. [online] <https://www.un.org/en/sections/issues-depth/big-data-sustainable-development/> February 2021].
Available [Accessed
at: 17
Cohen, J. and Kharas, H., 2018. Using big data and artificial intelligence to accelerate global development. [online] Brookings. Available at: <https://www.brookings.edu/research/using-big-dataand-artificial-intelligence-to-accelerate-global-development/> [Accessed 15 February 2021]. Ebikeme, C., Hodson, S., Boulton, G., Hackmann, H., Stevance, A. and Spini, L., 2016. Open Data in a Big Data World: challenges and opportunities for sustainable development. [ebook] Available at: <https://sustainabledevelopment.un.org/content/documents/95519_Ebikeme%20et%20al.__Open%20Da ta%20in%20a%20Big%20Data%20World__challenges%20and%20opportunities%20for%20sustainable%2 0development.pdf> [Accessed 18 February 2021]. Europeandataportal.eu.n.d.[online]Availableat: <https://www. portal.eu/elearning/en/module1/#/id/co-01> [Accessed 25 February 2021].
europeandata
Keeso, A., 2014. Big Data and Environmental Sustainability: A Conversation Starter.[ebook]Availableat: https://www.smithschool.ox.ac.uk/ publications/ wpapers/workingpaper14-04.pdf> [Accessed 23 February 2021]. MacFeely, S., 2019. The Big (data) Bang: Opportunities and Challenges for CompilingSDGIndicators. Global Policy, 10(S1), pp.121-133. Maaroof, PhD, A., n.d. BIG DATA AND THE 2030 AGENDA FOR SUSTAINABLE DEVELOPMENT. [ebook] Available at: <https://www.unescap.org/sites/default/files/1_Big%20Data%202030%20Agenda_stocktaking%20report_25.01.16.pdf> [Accessed 23 February 2021]. Oracle.com. 2021. What Is Big Data? | Oracle United Kingdom. [online] <https://www.oracle.com/uk/big-data/what-is-big-data/> [Accessed 25 February 2021].
Figure 2: Data privacy has become an increasingly important topic, posing a big challenge to Big Data (Pew Research Center, n.d.)
Available
at:
UN, n.d. Big Data and the SDGs. [image] Available at: <https://www.un.org/en/sections/issues-depth/bigdata-sustainable-development/> [Accessed 17 February 2021].
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ECONOMICS
Reconstructing Sustainability Objectives Post-Pandemic By Sania Zaffer
with resources to help combat the drastic impacts of pandemics and other possible external influences on their economies. Additionally, companies and small businesses that operate in these economies need to be provided with resources and knowledge on ways to protect their livelihoods in these unprecedented situations.
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The Covid-19 crisis not only put governments under pressure regarding their direction towards their sustainability agendas but also pushed companies into a test for their commitments towards corporate social responsibility. As companies faced financial strains during the pandemic in both the short-term and the long-term, many were forced to deviate towards short-term objectives, in turn reducing their investment and commitment towards their sustainability practices (He and Harris, 2020). These decisions were made considering the lack of resources and the threat of not surviving that many of these businesses experienced in the face of the pandemic. As a result of such negligence towards sustainability, it is essential that sustainability objectives are reconstructed following the recovery from the pandemic. This is imperative, considering that even the behaviour of civilians have caused a drop in environmental performance during the pandemic as individuals preferred to rely on personal vehicle use rather than public transportation, leading to excessive carbon emissions (Financier Worldwide, 2020). The Covid-19 pandemic was proof of how vulnerable some less developed countries are to external influences that impact their growth and the working of their population. There is a disproportionate threat towards these less developed countries in experiencing extremely destructive impacts on health, society and economic conditions of the countries (UN.org, 2020). Such effects are exacerbated due to the lack of domestic resources, debt levels and unstable healthcare systems that are not prepared or resourced to handle the excessive stress of pandemics. While these impacts may seem contained to the pandemic, there are devastating long term impacts on education, human rights, food security and economic development (UN.org, 2020) which is a serious sustainability issue. As a result, following the pandemic, objectives need to be revised to make these less developed countries further equipped
Corporate support is also needed in developed countries as a large gap has formed between sustainability and profits, following the economic fallout that many companies faced during the pandemic (APCO Worldwide, 2020). To shorten this gap, it is strongly recommended that sustainability key performance indicators should be set as goals for corporate leaders to meet, which would ensure that sustainability remains a priority for businesses. Such an objective would integrate sustainability into businesses which is believed to increase the level of success and survival that companies face, alongside giving companies a competitive edge. It is crucial for companies to connect with their investors and customers through sustainability practices to attract and boost positive attitudes towards sustainability which have been tainted after the pandemic. Such changes will not only be beneficial for the financial gain of corporations but will also lead to environmental benefits.
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ECONOMICS
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Another manner in which the pandemic has setback environmental progress is the changes in the lifestyle of consumers which has prompted them to produce more waste, and to do so without a second thought. The excessive utilisation of single-use plastics during the pandemic is a strain on the environment that is long-lasting in nature. Single-use masks, anti-bacterial wipes, PPE kits etc. were essential in our fight against the pandemic however, they have been a huge step back in regards to our fight against pollution (Flint, 2020). The rise in e-commerce and use of packaging was also a culprit. In addition to the excessive use, many recycling initiatives faced a halt in operations due to the risk of contamination and low level of workforce available (Kaza and Wahba, 2021). After the pandemic, to undo the damage faced to the environment, it is imperative that governments address global waste and establish wastemanagement systems that approach waste with a circular strategy (Kaza and Wahba, 2021).
By addressing these issues, it is evident that strenuous efforts have to be made to get governments, corporations and consumers back on track to sustainability practices and continue our journey into a greener economy. In order to do so, companies, both in less developed countries and extremely developed countries, need to be provided tools and knowledge that will help them survive and sustain their focus on corporate responsibility. For less developed countries, it is more essential that external forces do not drastically impact the health and welfare of their vulnerable population. Furthermore, pollution initiatives need to be not only resumed but significantly improved by using technology and finding innovative ways to conquer issues in wastemanagement. While sustainability has suffered in the presence of the pandemic, it should remain the topmost priority for all consumers, governments and corporations.
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References APCO Worldwide (2020). How to ensure sustainability remains a priority for businesses after the pandemic. [online] Eco-Business. Available at: https://www.eco-business.com/news/how-to-ensuresustainability-remains-a-priority-for-businesses-after-thepandemic/ [Accessed 2 Mar. 2021]. He, H. and Harris, L. (2020). The impact of Covid-19 pandemic on corporate social responsibility and marketing philosophy. Journal of Business Research, [online] 116, pp.176–182. Available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7241379/ [Accessed 27 Feb. 2021]. Financier Worldwide (2020) Reshaping the future: post-pandemic sustainability Financier Worldwide. [online] Financier Worldwide. Available at: https://www.financierworldwide.com/reshaping-thefuture-post-pandemic-sustainability#.YDlTqGj7Q2y [Accessed 27 Feb. 2021]. Flint, R. (2020). Covid-19: Single-use plastic impact “will last forever.” [online] BBC News. Available at: https://www.bbc.co.uk/news/uk-wales-54265590 [Accessed 2 Mar. 2021]. Kaza,Silpa and Wahba,Sameh (2021). Covid-19 caused a boom in single-use plastics. Here’s how to fix it. [online] WIRED UK. Available at: https://www.wired.co.uk/article/covid-plastic-waste [Accessed 2 Mar. 2021]. Un.org. (2020). World’s Most Vulnerable Countries Lack the Capacity to Respond to a Global Pandemic Credit: MFD/Elyas Alwazir | Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States. [online] Available at: https://www.un.org/ohrlls/news/world%E2%80%99s-mostvulnerable-countries-lack-capacity-respond-global-pandemiccredit-mfdelyas-alwazir [Accessed 1 Mar. 2021].
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ECONOMICS
Why the Economics of Biodiversity is Different By Advait Vaidya Everything essential to maintaining a fulfilled life originates in our biosphere — it is an extraordinary resource, but it is finite. Alarmingly, biodiversity is declining at a faster rate than ever before. Populations of mammals, amphibians, birds, fish, and reptiles have on average reduced by 70% since 1970 (Stockholm Environment Institute, 2021). Since optimising scarce resources is the focus of economics, biodiversity should be central to the literature. Rather shockingly, biodiversity has often either been completely omitted from economic models or added as a mere afterthought. So, how can an entire literature concerning resources, be deficient of something as fundamental as nature? To correct this issue, the HM Treasury sanctioned a review aiming to create a framework for thinking about the economics of biodiversity. Led by Professor Dasgupta from the University of Cambridge, the review highlights a need to incorporate nature into our economy in a more sophisticated manner.
Figure 1: The decline in biodiversity. Source: The Economist (2020).
Treating Nature as an Asset Dasgupta postulates that the economics of biodiversity is essentially "a study in portfolio management”. Everyone is either consciously or subconsciously managing a portfolio of assets. Governments manage the assets of a country; hedge fund managers manage their clients stock holdings and everyone else decides how best to spend their money. Every saving or spending decision is an example of a portfolio re-optimisation. As all wealth is obtained from nature, it would make sense to treat nature as a portfolio of assets.
WHY THE ECONOMICS OF BIODIVERSITY IS DIFFERENT | 18
ECONOMICS
Figure 2: Treating Nature as an asset. Source: The Economics of Biodiversity: The Dasgupta Review (2021) The best portfolios are diversified, and nature is no different, maintaining biodiversity is the key to managing nature optimally. This may seem obvious, but economists of the 20th century focused on maximising GDP and personal assets at the expense of nature. Perhaps in the past, there was a conflict of interest between the two, but now we are reaching a point where the incentives align. If nature is not preserved, there will come a point where sustaining growth becomes impossible. The Problem with GDP Incorporating nature into our economies requires precise measurements that give a fair assessment of a country’s situation. By excluding nature from its calculations, GDP fails to see the bigger picture. GDP measures the flow of output within a country which provides a reasonable estimate for a country’s income, but fails to consider a country’s assets, namely natural capital. A country that is rapidly increasing its GDP while depleting its
natural resources, is reducing its wealth and long-term growth potential by eating into its assets. The depletion of nature is slow and only becomes pertinent in the long-term, which is why GDP may temporarily feign reliability. However, in long-run it fails to account for depreciation. As the name suggests, it is a gross measure, not a “net” one. Therefore, developing quantifiable metrics that account for a country’s wealth will be crucial. After all, the aim of economic agents is to design a portfolio of assets that maximises wealth rather than income. Private and Social Costs As mentioned before, there may be situations where personal portfolio optimisations conflict with nature. In this case, the private cost of polluting to an individual may be less than the cost to society. In microeconomics, this is known as an externality. Traditional economics has tried to charge individuals for negative externalities through schemes such as pollution permits and carbon taxes,
however internalising social costs related to nature may not be so simple. This is where the economics of biodiversity differs from the economics of climate change. The problem with nature is that its magic is often discreet. Many of the processes sustaining our great planet are invisible, which makes them difficult to quantify. Furthermore, nature is often mobile, making it difficult to assign accountability for its degradation. For example, the melting ice caps at the poles are caused by industrial activity all over the world. It is impossible to determine who is responsible for which aspect, and so, the solution may be more complicated than simply taxing undesirable activities.
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ECONOMICS Moving Forward To prevent the adverse effects of climate change, it is important that we capture the above points in our models. The review by Professor Dasgupta is a start, but more work is needed to avoid wounding the biosphere at a faster rate than it can regenerate. We must not demand more from nature than it can supply, but instead augment our way of obtaining growth to accommodate nature.
References Dasgupta, P. (2021), The Economics of Biodiversity: The Dasgupta review. (London: HM Treasury) *The Economics of Biodiversity: The Dasgupta Review (publishing.service.gov.uk) (Accessed 4th March) Stockholm Environmental Institute (2021). ‘The Economics of Biodiversity: The Dasgupta review’ [online],available at: The Economics of Biodiversity: the Dasgupta Review | SEIV (Accessed 4th March)
Figure 3: The complexity of Nature. Source: The Economics of Biodiversity: The Dasgupta review (2021).
The Economist (2020). ‘Human beings are wreaking havoc on Earth’s biodiversity’ [online],available at: Daily Chart - Human beings are wreaking havoc on the Earth’s biodiversity | Graphic detail | The Economist (Accessed 4th March)
WHY THE ECONOMICS OF BIODIVERSITY IS DIFFERENT | 20
INNOVATION
An Entrepreneurial Solution
The 'Yes, But' Culture Will Not Save The World by Federico Scolari
ALSO IN THIS SECTION
27
Cleansing the Beauty Industry of Single-Use Plastic
30
Carbon Capture Technology - The Largest Incentive Prize In History
FEATURED
INNOVATION
THE 'YES, BUT' CULTURE WILL NOT SAVE THE WORLD A ROOSEGAARDE APPROACH TO SUSTAINABILITY
By Federico Scolari
Whenever potential clients and investors negotiate eye-toeye with Daan Roosegaarde, one of Europe’s leading artists and innovators, they sit on a 'Yes, But' chair. The chair is just like any other, with a simple twist: a voice recognition device produces a small pinch on their bottom anytime they pronounce an impeding “Yes, But” (TED, 2017).
According to Mr Roosegaarde, the 'Yes, But' culture inhibits innovation in sustainability. The chair is a mere metaphor for a much greater issue - the lack of vision and pragmatic initiative that prevents sustainable projects from taking off. Thus, when discussing a new project with prospective clients, Mr Roosegaarde attempts to only deal with those that reject the Yes, But conjecture and that embrace pragmatism instead - in other words, the Yes, let’s do it risk-neutral investor.
Mr Roosegaarde founded the social design laboratory Studio Roosegaarde in 2007 as a prime example of such philosophy. The Studio has worked on more than 35 sustainable projects across the globe, most notably in Europe and China. At the core of every project is a hybrid action plan based on both creativity and visual appeal. Creativity ensures that scientific-based solutions to sustainability issues are unique and ground-breaking. Visual appeal employs design and architecture as means of influence on the observer, that is, to create an internal impact within the individual, thus inducing him or her to think and act sustainably as they experience the projects. Every project serves a scientific purpose while evoking a poetic attitude towards the natural world. The resulting initiatives solve an array of problems, from pollution to non-renewables and energy waste, and provide suggestive landscapes for the observer. “It’s all about finding connections, between pragmatism and poetry, between fantasy and an Excel sheet” said Mr Roosegaarde at the Davos World Economic Forum in 2017. The studio has broken the boundaries of nearly every aspect of climate change. From revolutionary light-emitting highways to vacuum air cleaners, Daan Roosegaarde has pioneered an outstanding wave of optimism for the future ahead. Here are three of the most ground-breaking projects that have received international acclamation: SMOG FREE TOWER: A blend of architecture, design and scientific innovation, the Smog free tower is
FROM THE COVER: A ROOSEGARDE APPROACH TO SUSTAINABILITY | 22
FEATURED
INNOVATION
Studio Roosegaarde’s most famous invention. Aiming to make cities smog-free, the Studio has collaborated with governments and universities to design the first vacuum air cleaning tower. The 7-metre-tall tower filters and absorbs 30,000 m3 of air per hour using a small amount of wind power, allowing people to breathe clean air in public spaces for free. The accumulated smog particles, which contain carbon, are then compressed into a diamond ring that can be purchased to donate 1,000 m3 of clean air to the city. Winner of nine awards, Roosegaarde’s proposal has been adopted by six countries so far, impacting the livelihood of around 100,000 people per day.
THE SMOG FREE TOWER Cleans 30,000 m3 of air/hour (75% of PM2.5 and PM10 airborne particles) Impacts 100,000 people daily Only uses 1170 watts of green energy
Cumulative Air Cleaned from a single tower, 30 years projection, millions m3 12,500
10,000
7,500
5,000
2,500
0
2020
2025
2035
2050
GROW: Perhaps the greatest example of Roosegaarde’s hybrid philosophy, the Grow project is an homage to the beauty of agriculture and a solution to pesticide use. It consists of a blue, red and ultraviolet light recipe that shines across 20,000 m2 of farmland, which contributes to a 50% reduction in pesticide use while staging a dreamscape that brings light to farmers. The dancing lights also act as growth enhancers for plants and can only be seen within close proximity to avoid light pollution. GLOWING LIGHTS (Smart Highway): Roads must be safe, but they can also be sustainable (and beautiful). The Studio installed lights on the side of roads that charge during the day and glow during the night, increasing safety and severely cutting energy consumption for infrastructure. The project stems from the observation that, to achieve long-term sustainability, R&D on new transport technology should be complemented, if not overcome, by a focus on physical infrastructure, which is passed down from one generation to the other unlike cars or buses. As creative and efficient as Roosegaarde’s projects may be, they sometimes struggle to achieve scalability, a natural impediment to any stage of innovation. Materials are often expensive and investors are reluctant to provide the studio with the funds needed to develop technologies that may not work or may not be scalable in the future. But Mr Roosegaarde seems to seek motivation in this sort of obstacle and suggests that available finances in the sustainable world are due to increase exponentially. “I realised it wasn’t a lack of technology or money but a lack of creativity and imagination” he suggests. He observes that, given the ever-growing number of opportunities that characterise the sustainable world, more architects, designers and scientists should be collaborating to solve these issues. References Studio Roosegaarde (2014). [online] Smog Free Project. www.studioroseegaarde.net. Available at: https://www.studioroosegaarde.net/project/smog-free-tower (Accessed 24 Feb 2021) Studio Roosegarde (2020a). [online] Grow. www.studioroseegaarde.net. Available at: https://www.studioroosegaarde.net/project/grow Studio Roosegarde (2020b). [online] Smart Highways. www.studioroseegaarde.net. Available at: https://www.studioroosegaarde.net/project/grow (Accessed 25 Feb 2021) World Economic Forum (2020a). [online] Daan Roosegaarde, artist & innovator. Available at: https://www.weforum.org/people/daan-roosegaarde (Accessed 24 Feb 2021) TED (2017). A smog vacuum cleaner and other magical city designs [online]. Available at: https://www.ted.com/speakers/daan_roosegaarde (Accessed 21 Feb 2021) Head Picture: www.studioroosegarde.net/grow/project Daan Roosegarde Portrait, Deezer.com Smog Free Tower, www.studiorosegaarde.net
FROM THE COVER: A ROOSEGARDE APPROACH TO SUSTAINABILITY | 23
Q&A Sneha Shah Head of Communications at Recycleye
Sneha Shah Most startups tend to have a story behind their founding - where did the idea for Recycleye originate from? The idea originated from our CEO Victor Dewulf, who was studying for a PhD in Environmental Engineering at Imperial College London. He started his PhD after quitting his job as a banker at Goldman Sachs because he saw potential in the waste management industry and decided to pursue a PhD studying the sector. When he started his PhD he actually realised that the concept he was creating for his thesis was gaining a lot of traction in the waste management industry and so he contacted his friend at Imperial and asked him if he wanted to start the company. That friend is our current CTO Peter Hedley, who was studying an MSc in Computer Science at Imperial at the time and before that he was a software engineer and a data scientist at Ocado. They came together in September 2019 to formulate this company and materialise Victor’s thesis. They started out in Bournemouth taking out rubbish from public bins and trying to see if their vision system actually had potential. That’s really the story of the company, two people coming together and trying to revolutionise the waste management industry. What issues does Recycleye’s technology help to resolve within the waste management industry? Currently one of the main problems in the waste management industry is there’s no transparency and accountability. For example, in the oil industry if you were trading oil both parties would know what they are buying and selling, how much oil there is, what type of oil it is etc. but if you were trading in recyclable material you wouldn’t know how pure the material you’re trading is for example. This is a huge problem because there is no traceability in the industry, and
once waste is discarded generally don’t care about it.
people
$2 trillion worth of waste is produced each year globally of which only 8% is recycled so it’s really important that we find ways to increase recycling rates. One of those ways is to provide visibility on not only how much we are recycling, but what we are actually recycling in material terms. What Recycleye has created is two products that combine into one system. The first product is Recycleye Vision – using AI and a camera to capture the waste in material recovery facilities. What we’re really doing is providing material recovery facilities with highlevel data of how much material they’re processing but also data on their plant downtime, which is really important as it enables facilities to optimise how they work which is something they couldn’t do without our technology. These facilities have all these different machines and when waste comes through their facility, all of those machines are all really separated as the machines sort different materials. For example, one machine would sort aluminium cans and one would sort paper, but you don’t really know how effective each machine is and how much material is being processed through at any one time. By adding this camera and vision system, you’re really providing that transparency. If it’s added to every machine, you’re able to see the entire plant from the cloud at one time. The other thing that we’ve created is a highly intelligent robotic picking system. Currently, robots in the industry can cost anywhere from £250,000-750,000 so they’re really expensive. Because of this, the
facilities still use manual sorters so once the waste is processed through all of those machines, you have one last step of quality control to make sure there are no other materials that shouldn’t be in the paper line for example. Waste pickers are still needed for that because the robots are so expensive. Recycleye has partnered with the manufacturing technology sector and FANUC, the world’s largest robotics manufacturer, to develop an affordable robotic picker, which is a fraction of the cost of the other robots in the industry. It also enables the removal of manual sorters who suffer from fatigue, are at risk of plant closures because of COVID and also work on shifts. A robotic picker would mean the plant can run 24/7 at a consistent output compared to manual pickers who get tired say 4 hours into their shift and then can’t pick as quickly. A Recycleye robotic picker not only increases output but also reduces costs that you have with manual pickers, such as hiring costs and overhead costs. We’re trying to also reduce the operational and capital costs of a recycling facility with our technology as well as improve efficiency. The robot itself is powered by the vision system, which will detect the items and directly feed that into the robotic picker on what to sort. Our systems, which are a fraction of the cost of the current market, are not only providing transparency and accountability but they’re also actually reducing the cost of recycling so that they can increase their capacity through this new technology. In the company’s first year, Recycleye has deployed 7 computer vision system with the largest waste management companies across the UK and French market. We’ve also just opened a Paris office as we’re expanding further into Europe. Our robotics has currently been in R&D and is now ready for commercialization.
Q&A | 25
Sneha Shah Are they any plans for further expansion at Recycleye at the moment in terms of entering new geographies or offering new products? We’re really focusing on our commercial sales of the vision system, so that would be expanding into Europe and across the world and we’re doing this by continuing to work with the largest waste players to expand the vision system into all of their facilities. Our robotic system, which as mentioned before will be deployed at a client site later this year too. As Recycleye’s systems scale we are continually working to make this a modular system that’s easy to fit, take out and move. All of the other machinery that exists is really costly to move and replace but also really difficult to manage. Our vision system and robotic have been designed to have such an easy retrofit so that it can be deployed anywhere and that’s another way we’re differentiating ourselves. From your website we saw that you’d partnered with Microsoft - what does this partnership entail and how does it work? Recycleye joined Microsoft as part of their “AI for Good” program which is essentially a program for startups to use AI and data science for sustainable outcomes. They provide technological support and the first part of that is that all of our systems and our data is stored on the Azure cloud and not only does that mean it’s secure, but it’s also scalable in that as our data grows the Azure system can scale with it. They really helped to provide structural support to help Recycleye expand. The other thing they provided was strategic support. Through workshops and mentorship, we’ve been able to create a really good commercial roadmap. Even though now we’ve
graduated from the program, we continue to have a partnership where we collaborate to showcase Recycleye through Microsoft as much as possible. Do you think innovation such as your technology is sufficient for moving towards a circular economy or does there need to be legislation and government policy to go along with that also? I definitely think there needs to be a balance between both. I think first it’s worth mentioning that we’ve received several innovation grants from the UK government and European Union, so we are being supported by that. I do think regulation needs to be changed, as recently the UK failed to meet its 2020 recycling rate of 50% which was set by the EU, and
Half of the EU countries are on track to fail the 2025 recycling rate of 55% I think whether it’s at an international or national level regulation needs to come through, and the only way that there can be an increase in recyclable materials is when you reduce the cost of current recycling. That’s mainly being done through our system and another thing our system can do is there are lots of small costs associated with waste management. Not only is there massive machinery at waste plants but also transporting the waste from the city centre to far outside to an industrial estate incurs transportation costs. So what Recycleye’s robotics system and vision system can do together is they can be placed at the source of waste generation and sort automatically which removes that cost and also the emissions to transport the waste. That’s actually really important
so you can put our systems in shopping malls, airports etc. where actually a lot of waste is generated but it can instead be sorted then and there rather than being transported to a facility. What do you think are the biggest challenges Recycleye is currently facing or likely to face in the future? Currently, our team is growing, but you can never grow too much – one of the challenges is that our workload is getting extensive and that’s purely because we are getting in more and more deployments. So building out our systems to become slightly more autonomous to streamline the entire process from sales to deployment, but as we continue to grow that will become natural and part of our process so that’s one of the main challenges at the moment. One of the other challenges is that COVID restrictions have prevented us from seeing sites and facility plants, which has really slowed down the sales process. Another aspect we have to consider is reduced commercial waste as there’s now no-one going to the office, so the overall level of waste is reduced and for a lot of waste companies their revenue has declined somewhat. So it’s about how our system can fit into the COVID environment and be a business fit for when there is very little waste coming through the recycling facilities.
Q&A | 26
INNOVATION
Cleansing the beauty industry of single-use plastic ______________________________________________________
By Maxine Miller The world is awash in waste. Every year, 8 million tonnes of plastic is dumped into our oceans (IUCN, 2018) and the beauty industry is a significant culprit. This should come as no surprise when one considers the packaging of beauty products, which typically involves layers of superfluous cellophane, shrink-wrap, and plastic containers. In 2018, more than 120 billion units of cosmetics packaging were produced globally – the majority of which were not recyclable (Moore, 2019). This is an unsustainable practice that must be curtailed. Initiatives across the beauty industry are already underway to address this issue. For example, L’Oréal and Unilever have recently signed the Ellen MacArthur Foundation’s New Plastics Economy goals, pledging to catalyse change towards a circular plastics economy. Such efforts have undoubtedly been driven by consumer demands; the British Beauty Council found that one in seven consumers had switched beauty products between April and July 2020 in search of more sustainable alternatives. Nevertheless, innovative packaging designs and new business models are still required to enable sustainable consumption.
Recycling the “unrecyclable”
Only 14% of plastics used to package beauty products can be processed through traditional recycling centres (Prabhakar, 2020). This is where the expertise of companies such as TerraCycle will be valuable to identify new solutions. TerraCycle develops closed-loop systems for hard-to-recycle waste. They successfully
Figure 1: The packaging sector produces 141 million tonnes of plastic waste per year (Ritchie, 2018).
divert waste away from landfills and incinerators through a range of recycling programmes; including their recently launched collaboration with multinational cosmetics brand Maybelline. In over 1,000 stores across the UK, consumers are now able to dispose of cosmetics packaging using in-store recycling bins. The waste is transported to TerraCycle, where it is cleaned, sorted by polymer type, and manufactured into a variety of new products. Alternatively, the waste is used to supply custom materials to businesses. This avoids unnecessary extraction of virgin materials, which is important as over 90% of an average product’s environmental impact results from extracting and refining the raw materials from which it is made (TerraCycle, 2021). As demand for recycled plastics in Europe has grown four-fold (European Commission, 2018), TerraCycle’s services provide a stable flow of revenue for the recycling sector and its growing workforce.
The milkman reimagined Another initiative from TerraCycle is their Loop scheme that launched in the UK in July 2020. Dubbed “the milkman reimagined”, Loop is a zero-waste shopping platform, allowing customers to order a range of
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INNOVATION
Figure 2: REN Clean Skincare refillable bottles (Loop, 2021).
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household products in reusable packaging. REN Clean Skincare and Molton Brown are among the first beauty brands to sign up, currently offering their best-selling products in glass bottles via the Loop website. These products are delivered directly to customers’ doorsteps and, after use, the empty packaging is collected, refilled, and placed back on Loop’s virtual shelf. Following the scheme’s success in France, the US, and now the UK, the company has reported plans to expand its e-commerce model into new markets including Japan and Australia. By designing packaging to be reusable, Loop is paving the way towards a truly circular and zerowaste economy. However, logistics remain a crucial piece of this puzzle. Offering refills across the board in beauty not only demands a substantial overhaul in infrastructure, but the delivery of glass bottles directly to consumers also has a hefty carbon footprint of its own.
Once a niche ideal, the concept of refillable cosmetics and toiletries has permeated the mainstream. L’Occitane was one of the first high street brands to offer refillable options, launching their eco-refill pouches in 2008. These pouches use up to 90% less plastic than regular bottles and save the brand over 214 tonnes of plastic each year (L’Occitane, 2019). Today, even
personal care conglomerate Proctor & Gamble has announced plans to introduce refillable packaging across their beauty brands in 2021. This is certainly a positive step as the purchase of refills, in place of newly packaged products, has been found to eliminate as much as 70% of carbon emissions associated with the production of cosmetics (Moore, 2019). The global beauty industry has grown by nearly 5% each year since 2010 (Gerstell et al., 2020) and, consequently, so has its production of packaging. Single-use plastic is so firmly embedded in the modern supply chain that limiting its ubiquity will be a challenging process. These innovations provide a starting point in fostering circular solutions, however, they are not enough to make meaningful progress. Recycling efforts, such as those conducted by TerraCycle, will require significant investments in infrastructure to fully transform the UK’s plastics value chain. Consumer activism should also be incentivised to further encourage the consumption of cosmetics with reusable packaging. Ultimately, a successful transition away from single-use plastic packaging will call for sustained efforts between all stakeholder groups across the beauty industry.
References British Beauty Council, 2020. The Courage to Change. [online] British Beauty Council. Available at: <https://issuu.com/hubbubuk/docs/the-courage-to-change_20_2_? fr=sODYxYjIxNTU5MzU> [Accessed 20 February 2021]. Cosmetics design-europe.com [online] Image available at https://www.cosmeticsdesigneurope.com/Article/2020/06/22/COVID-19-means-sustainable-beauty-even-moreimportant-say-brands European Commission, 2018. A EUROPEAN STRATEGY FOR PLASTICS IN A CIRCULAR
CIRCULAR BEAUTY SOLUTIONS | 28
INNOVATION ECONOMY. [online] European Commission, pp.6,9. Available at: <https://ec.europa.eu/environment/circular-economy/pdf/plastics-strategy-brochure.pdf> [Accessed 20 February 2021] Gerstell, E., Marchessou, S., Schmidt, J. and Spagnuolo, E., 2020. How COVID-19 is changing the world of beauty. Consumer Packaged Goods Practice. [online] McKinsey & Company, p.3. Available at: <https://www.mckinsey.com/~/media/McKinsey/Industries/Consumer%20Packaged%20Goods/Our%20Insights/How%20COVID%2019%20is%20changing %20the%20world%20of%20beauty/How-COVID-19-is-changing-the-world-of-beauty-vF.pdf> [Accessed 20 February 2021]. IUCN, 2018. Marine Plastics. [online] IUCN. Available at: <https://www.iucn.org/resources/issues-briefs/marineplastics#:~:text=At%20least%208%20million%20tons,causes%20severe%20injuries%20and%20deaths> [Accessed 20 February 2021]. L'Occitane, 2019. L’OCCITANE speeds up its efforts to tackle plastic pollution thanks to the Ellen MacArthur Foundation. [online] Available at: <https://group.loccitane.com/sites/default/files/2019-10/PressRelease_L%27Occitane_EllenMcArthur_241019.pdf> [Accessed 20 February 2021]. Loop, 2021. REN Clean Skincare. [image] Available at: <https://loopstore.co.uk/brand/ren-clean-skincare> [Accessed 20 February 2021]. Moore, K., 2019. New Ways The Beauty Industry Is Testing Sustainable Practices. [online] Forbes. Available at: <https://www.forbes.com/sites/kaleighmoore/2019/06/11/new-ways-the-beauty-industry-is-testing--sustainable-practices/?sh=489031c1eb55> [Accessed 20 February 2021]. Prabhakar, M., 2020. Plastic-Free Beauty: The New Normal!. [online] Beat the Microbead. Available at: <https://www.beatthemicrobead.org/plastic-freebeauty-the-new-normal/#:~:text=When%20it%20comes%20to%20beauty,personal%20care%20and%20beauty%20products.> [Accessed 20 February 2021]. Ritchie, H., 2018. Plastic waste generated by industrial sector. [image] Available at: <https://ourworldindata.org/faq-on-plastics> [Accessed 20 February 2021]. TerraCycle, 2021. Environmental Benefit. [online] TerraCycle. Available at: <https://www.terracycle.com/en-US/aboutterracycle/environmental_benefits#:~:text=The%20impact%20of%20waste,five%20gigantic%20gyres%20of%20garbage> [Accessed 20 February 2021].
Photo from Cosmetics design-europe.com
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INNOVATION
Carbon capture technology sparks the
largest incentive prize in history By Rachel Irwin
Figure 1: XPRIZEFoundation competition announcement header (XPRIZEFoundation, 2021)
In January, TESLA CEO Elon Musk sent shocks across the internet when he tweeted his plan to donate $100m towards a prize for the best carbon capture technology created in an upcoming competition. His motivation for this enormous contribution stems from the disastrous implications of carbon emissions for climate change and environmental targets that demand rapid progress. For this contest, Musk will be working with the organisation ‘XPRIZE Foundation’, whose representatives estimate that 10 billion tons of CO2 must be removed from the atmosphere by 2050 to avoid global warming of over 1.5-2 degrees Celsius. This incentive prize could accelerate the increasingly important technological development and deployment of carbon capture tools.
What is carbon capture?
Can carbon capture occur naturally?
_____________________
The process of carbon capture strays from the conventional carbon reduction strategy that companies have most frequently implemented in recent years. It involves removing carbon dioxide already in the atmosphere, thereby reversing some of the damage that has already been done. The goal is to achieve net negative emissions by taking back emissions that were released decades ago and have accumulated in the airs and oceans.
A popular criticism of the millions of dollars being directed towards carbon capture technology is that planting trees, a significantly cheaper strategy, should be sufficient. Trees use CO2 in their process of photosynthesis and emit oxygen, hence they are natural
carbon capture tools. For this reason, water companies have recently been busy planting millions of new trees to make their industry carbon-neutral. However, achieving carbon neutrality seems to be an insufficient target, considering the extensive damage unleashed by decades of uncurbed carbon emissions. As Musk said in a written statement, “We want to make a truly meaningful impact. Carbon negativity, not neutrality”. The non-profit ‘Foundation for Climate Restoration’ labels the idea of planting trees at a sufficient scale to combat climate change as unrealistic. It estimates that we would need to plant forests covering the entire land area of the U.S. twice over to offset just one year of U.S. emissions. Furthermore, NASA Climate reports scientific findings that 86% of land ecosystems are
CARBON CAPTURE TECH SOLUTIONS | 30
INNOVATION
Figure 2: Carbon dioxide removal strategies (Revi et al, 2018)
becoming less efficient at absorbing increasing CO2 emissions. Therefore, increasing evidence suggests that technological solutions are a necessary complement to natural solutions if we wish to make a real difference in reducing CO2 levels hence the need for this competition. The contest, launching on Earth Day (April 22nd) 2021, will run for four years. Teams must come up with a technology that can remove one ton of CO2 from the atmosphere per day and can be stored for a minimum of 100 years. The winning team should also be able to demonstrate how their innovation can be scaled up to eventually remove gigatons (1bn tons) of CO2. Fifteen teams from around the globe are selected for the competition, with each team given $1m to help them develop their idea. The grand prize winner will be awarded $50m, second place will receive $20m, and third place will receive $10m. XPRIZE has branded this $100m competition the “largest incentive prize in historyan extraordinary milestone”.
Joe Rogan Experience” podcast, Musk reveals his uncertainty; he has precisely created the incentive prize to answer this question. It requires an extensive amount of energy to pull carbon from the atmosphere and store it for a long period. A 2019 Carbon Brief report explains that machines that directly capture CO2 require over half of global energy demand today and would still be a quarter of expected demand in 2100. Such an excessive energy demand may ironically be met by restrictions from environmental regulations which limit energy usage. The other pressing issue is the expense of such a project. Existing carbon capture methods, for example, Switzerland’s commercial carbon
capture plant, are extremely costly. An important feature of this technology is that it must be cost-effective. The process will require significant levels of investment and investors may be reluctant to take the risks involved with such a large-scale and uncertain project. However, Musk’s competition funding will potentially neutralise some of this risk. Recently stating that “money isn’t an issue” it appears Musk is willing to pay for developments if a promising technological innovation is devised. If groups can demonstrate their technology works and use essentially philanthropic money to do it, this should stimulate sufficient interest amongst investors. This competition is therefore a new and extravagant way to encourage the development of carbon capture technology - a green practice that is rapidly gaining relevance. Although existing methods prove too expensive, too energy-demanding and too difficult to develop on a large scale, perhaps the generous handouts will catalyse an acceleration of innovative technologies that will overcome these restrictions. Launching in April, we will soon see what $100m prompts some of the world’s brightest minds to come up with.
Carbon capture technology: a ground-breaking or unrealistic solution? Is it even feasible to create a carbon extraction technology that will significantly reduce CO2 levels in the atmosphere? When asked on “The
Figure 3: Photograph of Climeworks carbon capture plant, Switzerland
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INNOVATION References Cambridge Live News (2019). Water companies pledge to plant 11 million trees by 2030. Available at: https://www.cambridgenews.co.uk/news/uk-world-news/water-companies-pledge-plant-1116754456 (Accessed 24 Feb 2021) Carbon Brief (2019). Direct CO2 capture machines could use ‘a quarter of global energy’ in 2100. Available at: https://www.carbonbrief.org/direct-co2-capture-machines-could-usequarter-global-energy-in-2100 (Accessed 24 Feb 2021) CNCB (2021). The who, what and where of Elon Musk’s $100 million prize money for carbon capture innovation. Available at: https://www.cnbc.com/2021/02/08/who-what-where-of-elon-musks100-million-prize-for-carbon-capture.html (Accessed 24 Feb 2021) Dezeen (2021). Elon Musk launches $100 million carbon capture competition. Available at: https://www.dezeen.com/2021/02/09/xprize-carbon-removalcompetition-elon-musk-carbon-capture/ (Accessed 24 Feb 2021) Revi et al (2018). Summary for Urban Policymakers: What the IPCC Special Report on 1.5 C means for Cities. Available at: https://www.researchgate.net/publication/329679906_Summary_for_ Urban_Policymakers_What_the_IPCC_Special_Report_on_15_C_mea ns_for_Cities (Accessed 29 Mar 2021) NASA Climate (2020). Land Ecosystems Are Becoming Less Efficient at Absorbing Carbon Dioxide. Available at: https://climate.nasa.gov/news/3057/land-ecosystems-are-becomingless-efficient-at-absorbing-carbon-dioxide/ (Accessed 24 Feb 2021) XPRIZE Foundation (2021). $100M Gigaton Scale Carbon Removal. Available at: https://www.xprize.org/prizes/elonmusk (Accessed 24 Feb 2021)
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GREEN FINANCE
Investors Switching Gears
What Will it Take For Investors to Go Green? by Ed Cox
ALSO IN THIS SECTION
43
Are We In A Green Bubble and Does It Matter?
45
ESG and M&A - The Real Value
FINANCE FINANCE
FEATURED
What will it take for Investors to Go Green?
By Ed Cox
The UK’s Climate Change Committee estimate the UK will have to invest £50bn annually to meet its target of being carbon neutral by 2050 [1] and have reiterated time and time again that the private sector will have to be the predominant contributor in this, making up to 90% of the required investment [2]. Now, governments, regulatory bodies, central banks, and others are considering how exactly to get investors on board.
Green bubble
The SBR has reported on the huge inflows of capital into ESG funds in recent months, and the changing behaviours of big-name firms in legacy industries. However, the outright transformation of firms’ and investors’ behaviours that climate targets require has yet to materialise. Most ESG funds are less than a decade old and so having not yet proved that they can stand the test of time, many risk-averse investors may shy away from pouring in cash just yet. Furthermore, data and analytics agencies such as RobecoSAM and Sustainalytics often take very different approaches to applying ESG ratings, which can mean that the same company can receive seemingly contradictory results. This lack of consistent green standards does little to assure investors of risks and returns and may lead many to
make more tried and tested investments with metrics they recognise and trust. Having learned the hard way in the dot com bubble of 2000 (in which adoption of internet-related technologies lead to rapid growth in investment in infant, internet firms; before the market tanked), investors may be wary of backing such infant green industries. Some consider the sudden increased interest in sustainable finance to be contributing to the inflation of a ‘Green Bubble’ [4]. In fact, to take one example many in the solar industry have already lost out, with over 100 solar companies going bankrupt in the four years to 2015 [5].
S&P Global Clean Energy index S&P 500 index
Figure 2: Forward price to earnings ratio for clean energy stocks and general stocks Increasing forward price to earnings ratios can be considered a sign that a bubble is forming. Valuations on clean energy stocks have soared relative to the rest of the market since the pandemic [6]
If you can’t measure it, you can’t manage it
Figure 1: Relationship between ESG Score Ranks of Major Providers for Companies in the S&P 1200 Global Index “ESG scoring methodologies vary, partially reflecting the lack of a generally accepted ESG taxonomy” [3]
It is the basic requirement of any market to be able to present actors with trustworthy information to instil a reasonable level of trust that their investments are secure. Therefore, the development of congruent metrics and frameworks to measure the financial and real-world success of green investments will be a decisive step in attracting well-considered investment.
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FINANCE FINANCE
FEATURED
The EU Taxonomy on sustainable activities forms part of the Commission’s sustainable finance strategy and aims to set sustainability standards to properly measure the realworld success of green initiatives. This not only helps investors decide which initiatives are likely to be impactful but also provides a framework for programmes to develop against, hopefully improving their quality. This is by no means a silver bullet, but with more and more ESG funds entering the market, having clear standards will assist funds in carving out their niche, satisfying investors’ varying risk appetites.
Public-private ventures Public-private ventures are a cruder way to encourage the mobilisation of private capital by collectivising risk. This strategy is the bedrock of the EU’s €1 trillion Green Deal Investment Plan (GDIP) [7], which has led to the development of the InvestEU Fund, a policy instrument and delivery tool to be launched with the 2021 EU budget. "The InvestEU Fund instruments will seek to
Figure 3: Risk to return profile of sustainable funds and comparator global equity funds There is no consistent evidence that sustainable funds under or over perform against conventional funds [3] expected to be lower and so requirements on capital could be reduced, encouraging investment in these areas. Christopher Flensborg, Head of Sustainable Products at SEB Bank, believes that the purpose of a green supporting factor should be to address macro-risks, not micro-risks:
attract commercial financing to support projects where financing could not be obtained without InvestEU Fund support. It will also target higher risk
“Direct risk from an asset on a balance sheet should
projects in specific areas" [8]
already be covered by a bank’s internal credit process
25% of the EU budget will be mobilised for climateconscious financing as a result, making the GDIP exactly
and is not the responsibility of the regulator”, rather, “regulators should be giving incentives to activate the financial sector to engage in dealing with those
the type of move on behalf of government that is needed to
[macro] risks.” [9]
demonstrate that this is the way forward. A similar publicprivate green venture capital fund has also been
It is worth considering; what is the point in regulators
recommended by the UK Government’s Green Finance
assuring that individual firms are financially sound when
Taskforce.
this does little to combat, and could even worsen (through
A green supporting factor
inadvertent encouragement of ‘safer’ but still dirty assets)
For investors for whom ESG factors are not of paramount importance there can often be no clear advantage of incorporating proactive ESG factors into their decisionmaking process (see figure 3). It is for this reason that there have been calls for regulators to step in to make greener investments the natural choice in instances where existing government policy is not enough.
the systematic risks faced by the financial system as a result
A ‘green supporting factor’ to micro-prudential policy
It would be foolish to sacrifice short term financial
would reduce capital adequacy ratios on green assets as
stability by relaxing very necessary financial regulations,
they may be considered less risky. Financial institutions
even if promoting green investments could foster longer-
are required to hold a certain amount of capital against
term resilience against climate-related financial risks.
assets in order to help keep them afloat in case the assets go
Though granted, it may not be enough just yet, this
bad. In the case of greener assets, the chance of default is
promotion is already being done by the government.
changing climate? Capital adequacy ratios are set for a reason though, and as discussed; green investments are often no less risky than others. Any loosening of capital requirements would simply reduce resilience to financial instability in the shorter term.
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FINANCE FINANCE
FEATURED
A more cautious, risk focused approach could be
understanding. The launch of the InvestEU Fund this year
todiscourage investment in legacy industries with a ‘brown
will surely embolden ever more green investment. Until it
penalising factor’. This would increase capital adequacy
has been proved otherwise, desperate weakening of
ratios on dirty investments, encouraging divestment away
regulation should be avoided.
from these industries. Although it has been argued that divestment has no real climate impact because these dirty industries are typically not capital-starved anyway, this would help to insulate individual actors from climaterelated financial risk in the short term. Even if such a policy may not be particularly impactful from an environmental point of view, it would at least contribute to regulators fulfilling their function. In the same vein, there are various approaches that central banks could take on this issue. For example, in a bid to insulate themselves from climate-related financial risk, they could follow a simple strategy of accounting climate risk into their bond-buying decisions. This would likely equate to divestment in dirty industries. Alternatively, they
References: [1] https://www.theccc.org.uk/wp-content/uploads/2020/12/The-SixthCarbon-Budget-The-UKs-path-to-Net-Zero.pdf [2] https://assets.publishing.service.gov.uk/government/uploads/system/uplo ads/attachment_data/ file/703816/green-finance-taskforce-acceleratinggreen-finance-report.pdf [3] https://www.imf.org/en/Publications/GFSR/Issues/2019/10/01/globalfinancial-stability-report-october-2019#Chapter4 [4] Per Wimmer: The Green Bubble, 2014 [5] https://www.greentechmedia.com/articles/read/the-mercifully-shortlist-of-fallen-solar-companies-2015-edition#gs.KiaYcys [6] https://www.ft.com/content/0a3d0af8-7092-44c3-9c98-a513a22629be [7] https://ec.europa.eu/commission/presscorner/detail/en/qanda_20_24 [8] https://ec.europa.eu/commission/presscorner/detail/en/memo_18_4010 [9] https://www.responsible-investor.com/articles/gsf-hleg [10] https://www.weforum.org/agenda/2020/01/top-global-risks-reportclimate-change-cyberattacks-economic-political/
could actively pursue genuinely green investments during Quantitative Easing programmes.
Stay in lane This discussion boils down to what the role of regulators and central banks should be, whether they should focus on macro risks (as suggested by Flensborg) or on risks associated with individual firms. If macro, one may ask how macro? There is indeed no end to the number of factors that affect financial stability - so why stop at climate? Why not attempt to tackle the risk associated with food crises and infectious diseases too? Both of these issues have been ranked as some of the most impactful global risks (alongside climate risks) by the WEF [10]. By following this strategy, central banks run the risk of being too hampered by secondary commitments that they are unable to fulfil their primary task of maintaining price stability and regulators their key objective of financial stability. For these reasons, it should be the role of government to develop ways in which investors can be encouraged to do more than just divesting (through the first means discussed), while regulators and central banks remain committed to their primary tasks. The IMF has suggested that regulators and central banks take the hands-off approach of providing intellectual leadership in the assessment of ESG risks [5] which would surely complement the development of new standards, creating better
FROM THE COVER: HOW TO ENCOURAGE GREEN INVESTMENT | 36
Q&A Deirdre Cooper Co-Head of Thematic Equity at Ninety One
Deirdre Cooper Would you please introduce yourself and give us a little background on your current role? I work at Ninety One, an asset management firms that manages around $56 bn and invests in equities and fixed income globally. Half of our business is in emerging markets, personally I am the co-head of thematic equities, which is the sustainable focused funds and I also run the Ninety One Global Environment Strategy, which invests in the solution providers for decarbonisation. I’ve been working within the sustainable finance industry in one function or another for almost 20 years now.
The people that work for the company are obviously a cost, but they’re also your biggest source of future value I also work on the advisory board of the Climate Centre at Imperial College, where I speak to the students and give some guest lectures as part of the climate finance Master’s program which some of your students may be interested in. How would you define sustainable investing and how does it differ from mainstream investing? Interesting question! This is actually something I think the industry is struggling with, if you were to ask 10 different Asset Managers or Private Equity investors you would probably get 10 slightly different definitions. Effectively throughout history Asset Management has only really been concerned on one set of stakeholders – shareholders. What we haven’t considered previously is that companies have many other stakeholders, including natural capital
– what that company is doing has an impact on carbon emissions and also water, waste and biodiversity. If you irreparably damage that stakeholder you will have to pay with regulation, taxes and a reputational hit. Maybe your customers would even stop purchasing your product. Companies have also always had a really important stakeholder in terms of their human capital. The people that work for the company are obviously a cost, but they’re also your biggest source of future value. As we move towards more of a knowledge-based economy, physical capital such as factories becomes less important and the people you hire and retain are increasingly more important. Companies who do a good job with their human capital, not just paying them well but also training them and ensuring the company has a good culture, those companies will do better over time as they will be able to attract better human capital to the firm. We’re also only now starting to think about a company’s impact on society as a whole. This includes both positive and negative impacts, you have companies with negative externalities such as the tobacco industry. The impact that the industry has then comes back to hurt the company financially, in the form of taxes and also reduced social acceptance. Companies that sell very sugary foods also probably have a similar issue as well as alcohol and gambling. There are also some companies with positive externalities, such as recently AstraZeneca with their vaccine, where they are giving it away at cost or for free to certain parts of the world. They are doing that not only as it’s the right thing to do, but it will also help their reputation when it comes to negotiations with governments.
This is quite different from the beginning of sustainable investing movement, which was focused on norms-based exclusions. This was due to personal preferences from clients who were against investing in certain unethical industries, such as those with a religious objection to supporting alcohol for example. That’s a different way of going about it rather than looking through an externalities lens, because there will be some cases where something may disagree with someone’s ethical norms but it’s not something that we see as significant enough where it may impact the level of their investment in the future. How did you get involved with the sustainable investment industry? I started at Morgan Stanley in their Corporate Finance practice around the time of the 2001 tech bubble and then decided to go and do an MBA at Harvard Business School. I enjoyed working at Morgan Stanley, the work was very fast-paced and challenging but I just wanted to do something that had a bit more meaning where I felt that the work that I was doing could have a positive impact. I worked in Pakistan in micro finance for about 6 months, working for a charity that was lending money to women in very poor areas. During my MBA summer, I worked at the United Nations where I was also working on a micro finance initiative. I then ended up going back to Morgan Stanley but working in a slightly different area. My work was focused on how, as a large investment bank, we could best mobilise capital in more sustainable directions. To achieve this, we worked on securitisations of microfinance, government advisory work and thought a lot about the role of finance in building a sustainable economy. Then I started a cleantech banking
Q&A | 38
group at MS to advise companies in 2006 and also to invest in those companies. I then moved to a client of mine to focus more closely on the investing side, with the aim of allocating capital to companies helping to solve climate change. Do you think enough is being done at the moment in terms of sustainable investing? I’m absolutely optimistic, when you consider the question of “do we look to be in a better position than we’ve ever been” that’s unquestionably the case. We’re now in the position where more than 60% of the world’s emissions are in countries with net-zero pledges, such as China, the EU-27 and many others. We have a really strong momentum, but obviously it will take time to implement the necessary changes. The other thing that really helps is that there has been enormous progress from all the companies within the decarbonisation universe in terms of tech improvements and cost reductions. Generally speaking, we’re now at a place where we know what to do to decarbonise the heavyemitting sectors and it won’t be more expensive than the alternative. You can now build a zero-carbon electricity grid and it wouldn’t cost more than an electricity grid today for example. Consumer behaviour is also important to consider as individuals are now more conscious of the sustainability footprint of the products which they buy. This then prompts companies to develop more sustainable products such as Apple, who are planning to build a zero-carbon iPhone within the next 10 years. There’s definitely a CSR motivation behind that decision, but I believe that the key driver is that they know consumers will want to buy that product that is more sustainable, and this will allow them to keep that
high-end luxury position they have within the market. In terms of the macro environment, most of the countries which have net-zero pledges tend to be richer countries. This means they tend to have lower interest environments, compared to developing countries which tend to have higher interest rates, in turn making investment harder in those regions. It’s also important to consider that developing countries were not a cause of the problem in the first place. If you look at historical emissions, they haven’t been caused by Sub-Saharan Africa, they’ve been caused by the West. Ultimately, I think it’s important that we allocate capital to emerging countries to help them transition, as well as ensuring that developed countries also transition in an effective way. As a board member of Girls Who Invest, how do you feel the industry performs in terms of gender diversity and have you experienced any differential treatment as a woman in a male-dominated industry? Girls Who Invest has a mission to increase the amount of investable capital in the world that’s managed by women to 30%. It’s probably in the single digits at the moment, which is clearly not enough. I can’t point to any situations affecting me personally, but I can certainly say people who manage capital have exceptional power. The lack of diversity among the people making those investments decisions is extraordinary, and that absolutely needs to change. When you look at diversity metrics for the investment management industry as a whole, they don’t look that bad but most of the diversity tends to be on the marketing side rather than among those making investment decisions. It’s a big passion of mine not just to increase the number of women in asset management, but to increase the amount of female portfolio managers and risk takers.
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FINANCE FINANCE
Venture Capital: ESG-Compatible or Unfortunately Impractical? By Sebastian Thomas “Profit at all costs” is a common mantra associated by onlookers towards the venture capital industry. However, the perceived catch-22 between profits and purpose has been gradually dissipating. “The venture industry moves toward returns,” said Dan Oros, partner at G2VP, a venture firm focused on sustainable industrial technology. “If investors start making huge returns in [these] companies, then they will invest in those things.” (Chernova, 2021).
Philanthropists or Venture Capital? Robert Downey Jr., best known for his role as Iron Man, announced in January that he is launching two ESGfocused venture capital funds to support his vision for fighting climate change through bioplastics, aquaculture, A.I., and more. While celebrity-backed environmental investing is not a new phenomenon, the timing may also be fortuitous. In a letter to CEOs, BlackRock CEO Larry Fink quoted statistics demonstrating the sheer pace of ESG demand. Between January and November 2020, investors in mutual funds and ETFs splurged $288bn into “sustainable” assets - 96% higher over all of 2019 (Dunn, 2021). Despite this, there are few major ‘impact investors’ in the current venture capital landscape.
Impact investing is an investment strategy by GPs (general partners, meaning those who manage the pooled funds and make the investments) that aims to create a positive social or environmental impact alongside financial returns for their LPs (limited partners, the individuals who invest into a fund). But this number is growing. Recently in Germany, Revent, a brand new European early-stage (investing in pre-seed to series A startups, the earliest 3 stages in the capital-raising process by startups) venture capital firm, launched an impact-focused fund in February. Their mission is to positively affect the lives of 1 million people and to abate 5 million tons of CO2 (Butcher, 2021). “We’re entering into the era of the purpose economy – it’s no longer about what can be built, but what should we build and what change should we make to the planet and society,” says Lauren Lentz, founding partner at Revent, who went on to say “purpose-driven companies will be the most successful companies of tomorrow” (Lewin, 2021). Founders Future, a French VC firm, also launched a new fund in February focused on supporting impact-driven entrepreneurs, particularly interested in vertical farming, last-mile delivery, mental health, mobility, clean alternatives to packaging and those working in the circular economy (Pratty, 2021). In the UK, OXGAV, a partnership announced
CAN VENTURE CAPITAL ACHIEVE ESG GOALS? | 40
FINANCE FINANCE in January between Oxford University and Global Accelerated Ventures, aims to launch between 13 and 20 new climate-addressing startups over the next 2 years, all of which will receive at least £250k in seed investment (Drumm, 2021).
The Catch-22:
“We’re not acting as philanthropists,” Otto Birnbaum, Revent general partner, said, “but rather aim to demonstrate that achieving very attractive financial returns is possible precisely because of the positive impact these companies will achieve.” (Butcher, 2021). Sadly, little data currently exists to convince LPs and VCs. Many LPs and institutional investors insist on conditions. On the one hand, some may demand no investments into startups relating to the arms industry, or making the extraction of fossil fuels more efficient. However, LPs just as easily could ask for no food and drink investment; an area that demands sustainable innovation. Impact funds must listen or forgo the investor. On top of that, some LPs who have bought into the projects question whether they are ahead of the curve; perhaps there are not yet enough great impact-focused startups to invest in. On the other side, discovering founders’ true motivations and whether they truly align with an impact focus is important. “It’s surprisingly easy to spot founders who are trying to spin an impact story versus those where this is the reason they’re doing it,” says Lentz (Lewin, 2021). Forecasting the true “impact” a startup could have on society or the environment is very difficult for due diligence teams. A company might change path, focusing on projects that appear less “impactful”. Take TransferWise, a well-known British unicorn specialising in making foreign currency transactions more transparent, cheaper and easier, which has since moved away from its initial espouse of ‘economic empowerment’. Impact investors have a responsibility to ensure their portfolio’s core missions remain on an ESG focus.
Average ticket sizes were mostly unchanged, but there are very different effects observed between industries. It’s no real shock that traveltech startups have suffered the most in both ticket sizes and deal numbers, nor that health companies have seen mostly the opposite. All these industries but healthcare saw a decline in series B deals, explained by the fact that health-related companies tend to need more capital before reaching sales.
"Pandemic, Schmandemic..." Uncertainty leads to reduced spending in all aspects of our lives, including VC investing. To avoid panic, many VCs, which are obligated to invest their capital, openly announced they are still open for business. A closer look at the data reveals the actual impact COVID19 has had on the VC landscape using U.S. Crunchbase data a few months after the pandemic began (Sagie, 2020).It shows that the number of VC rounds in the U.S. shrank by 44%, but early-stage saw the biggest decline.
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The graph above shows the pandemic’s immediate impact on startups in different sectors (Wijngaarde, 2020). The acceleration of many incumbent trends (top-right quadrant) that have impact-focus elements is a common feature, such as online education, telehealth, food delivery. Others, however, such as mobility have been badly hit. Lowry and Wright (2020) also found an immediate rise in the importance of a founding team’s response to COVID-19 as a key consideration for investment committees. The “purpose economy” has been accelerated by the COVID pandemic, which has amplified many of the planet’s systemic problems, such as inequality of access to healthcare and education as well creating massive changes in the world of work. How long will it be until mainstream venture capital realises this? References Butcher, M. (2021). New European early-stage VC Revent launches with an impact focus, and sights set on a $60mn first close [Online]. Available at: https://techcrunch.com/2021/02/16/new-european-early-stage-vc-revent-launches-with-its-sights-set-on-a-60m-first-close/ (Accessed: 16th February 2021). Chernova, Y. (2021). SPAC Demand to Draw VCs to Clean Tech [Online]. Available at: https://www.wsj.com/articles/spac-demand-to-draw-vcs-to-cleantech-11611311402 (Accessed: 14th February 2021). Drumm, S. (2021). Oxford University set to launch up to 20 sustainability startups in two years [Online]. Available at: https://sifted.eu/articles/oxforduniversity-oxgav/ (Accessed: 14th February 2021). Dunn, K. (2021). An Iron Man goes Green: Robert Downey Jr. launches ESG-focused venture capital funds [Online]. Available at: https://fortune.com/2021/01/27/robert-downey-jr-launches-venture-capital-funds-esg/ (Accessed: 12th February 2021). Lewin, A. (2021). ‘For profit, for purpose’ VC firm Revent launches targeting a €50m fund [Online]. Available at: https://sifted.eu/articles/revent-launch/ (Accessed: 16th February 2021). Lowry, W. & Wright, J. (2020). The Impact of COVID-19 on the impact investment market [Online]. Available at: https://www.clearlyso.com/insight/newsreports-and-think-pieces/the-impact-of-covid-19-on-the-impact-investment-market/ (Accessed: 10th February 2021). Pratty, F. (2021). Founders Future: a new fund for impact startups [Online]. Available at: https://sifted.eu/articles/founders-future-new-fund/ (Accessed: 15th February 2021). Sagie, I. (2020). How COVID-19 Changed the VC Investment Landscape In The US [Online]. Available at: https://news.crunchbase.com/news/how-covid-19changed-the-vc-investment-landscape-in-the-us/ (Accessed: 10th February 2021). Wijngaarde, Y. (2020). Impact of the Corona crisis on startups & tech [Online]. Available at: https://blog.dealroom.co/impact-of-the-corona-crisis-onstartups-tech/ (Accessed: 10th February 2021).
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Are We in a Green Bubble and Does It Matter?
By Luke Parsons
Rocketing valuations for ESG stocks are making investors increasingly concerned about the possibility of a ‘green bubble’. A bubble, in which stock prices rise beyond their fundamental value, is most apparent in companies addressing environmental problems through green (clean) energy and tech. Closely resembling past bubbles, the clean tech sector’s value has almost tripled in the past year (Bloomberg) and since mid-2018, alternative energy stocks have more than doubled (Business Insider).
Is There a Bubble?
It also appears that the remarkable rise in valuations isn’t justified by changes in companies themselves, providing further evidence that there is a bubble. Many are trading at exceedingly high multiples of their earnings, if they are profitable at all. For example, three companies in green hydrogen, a green energy source, have risen between 400% and 1,600% in the last year (Reuters) despite having never been profitable. Even more hockingly, electric
vehicles maker Rivian, who is yet to build a single vehicle, is seeking a $50bn valuation when they go public. In comparison, market leader Ford is worth $47bn. The key driver of price increases has been huge demand for environmentally themed investments outstripping supply. Investors are scrambling to put capital into companies tackling environmental problems as consumers and governments become more environmentally oriented. In 2020, assets held in funds investing in environmental themes reached a record $1.2trn (Bloomberg). Moreover, investors have cast their net wide, often investing in high-ESG rated companies with little discretion for actual performance. A unique feature of this trend has been the role of passive investing. ETFs (exchange-traded funds) which track the performance of a stock index instead of trying to outperform it by actively buying and selling stocks, have been a strong driver of growth in ESG-related assets and have increased prices disproportionately. To continue to track an index as investors’ money flows into them, ETFs automatically increase stock holdings with no discretion for price, whereas active investors can opt to wait for better prices. Consequently, additional dollars in ESG-themed ETFs may increase companies’ market value by over $17 on average, relative to $2.50 for active strategies (Green, 2020). That being said, valuations may be justified. The climate crisis’ scale means returns to companies addressing it could be equally massive. For example, cheap green hydrogen is often described as the holy grail of the green energy transition and as such, hydrogen strategies are a key element
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FINANCE FINANCE of many countries’ decarbonisation plans. Investment in it has already materially increased the energy source’s efficiency such that it, like many other clean technologies, is the closest to commercially viable it has ever been. Additionally, ESG-related stocks’ outperformance can’t be fully attributed to bubbles. They typically outperform traditional investments somewhat due to the superior earnings growth and lower risk and volatility of high-ESG rated companies (MSCI).
like Google and Facebook. Investors’ reckless abandon also means at least some of their investments will survive to become meaningful ‘green’ players. So, the bubble will almost certainly help combat climate change. However, unpredictable investment booms and busts are economically disruptive and a grossly inefficient means of addressing climate change. The fact we must rely on investors’ speculation speaks to the inadequate action from those with the power for rapid change, governments and consumers worldwide.
More Bubbles to Come?
In my view, green energy and technology sector valuations are unsustainable and a bubble does exist. Moreover, the investment shift towards ESG-related assets shows no sign of abating. Pandemic recovery programs even encourage it, with Biden pledging greater green energy investment and the EU’s stimulus package being tied to environmentally friendly practises. What’s more, institutional investors expect convergence between ESG and non-ESG-products by 2022 (PWC, 2020). We appear to be only at the start of a large thematic shift, with potentially more bubbles to come.
Source: Worley
Does It Matter? When bubbles burst and prices collapse investors suffer large losses. If a green bubble does exist, this effect is inevitable but economy-wide impacts are likely to be minimal. This is because the bubble is focused on relatively narrow sectors and largely restricted to equities and not debt for which there would be more severe effects. While potential damage from a green bubble is limited there remains tremendous potential upside. Enormous capital flows into ‘green’ sectors reduce firms’ cost of capital and increase its availability. Consequently, the ESG investment frenzy enables green firms to finance themselves and future investment more easily and cheaply, potentially speeding up the green energy transition and combatting climate change. In capital-intensive sectors like energy and vehicle production, small changes in costs of capital can markedly alter the feasibility of investment projects and ultimately the likelihood of commercial success. Moreover, although this frenzy may crash, companies involved will likely leave behind productive assets or advantages. For example, if leading green hydrogen companies disappeared, progress on fuel cell efficiency would not be lost with them! Similarly, the dotcom bubble helped to finance fibre optic infrastructure that reduced bandwidth costs, facilitating the emergence of web 2.0 giants
References
Bloomberg. (2021). Green Stimulus is Here Already. It Just Wasn’t Planned. Available at: https://www.bloomberg.com/opinion/articles/2021-0122/tesla-and-other-green-energy-investments-look-bubble-like (Accessed 9th February 2021). Bloomberg. (2021). Dot-com Era Stock Valuations Bring Bubble Fears to ESG Funds. Available at: https://www.bloomberg.com/news/articles/202101-26/dot-com-era-stock-valuations-bringing-bubble-fear-to-esg-funds (Accessed 9th February 2021). Business Insider. (2021). The stock market's green energy bubble will burst eventually, but it could help save the planet along the way. Available at: https://www.businessinsider.com/stock-market-green-energy-bubblegood-world-climate-change-2021-1?r=US&IR=T(Accessed 9th February 2021). Reuters. (2021). Analysis: A lot of hot air? Investors snap up hydrogen stocks in green frenzy. Available at: https://www.reuters.com/article/ushydrogen-stocks-analysis-idUSKBN29P0LH (Accessed 14 th February 2021) Green, M. (2020). Policy in a World of Pandemic, Social Media and Passive Investing. Available at: https://www.logicafunds.com/policy-in-a-world-ofpandemics (Accessed 14th February 2021). MSCI. (2020). Is ESG Investing a Price Bubble? Probably Not. Available at: https://www.msci.com/www/blog-posts/is-esg-investing-a-pricebubble/02231869256 (Accessed 16th February 2021). PWC. (2020). 2022 – The growth opportunity of a century. Are you ready for the ESG change?. Available at: https://www.pwc.lu/en/sustainablefinance/esg-report-the-growth-opportunity-of-the-century.html (Accessed 16th February 2021).
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ESG and M&A - The Real Value "ESG matters are now mainstream and can no longer be considered an afterthought in M&A decision-making. They demand heightened attention on M&A transactions, across all sectors. Through ESG due diligence and post-transaction risk management should now be part of the M&A practitioner's toolkit." Gavin Davies, Head of Global M&A at Herbert Smith Freehills
Selection and Business Targets Many ‘new and revolutionary’ ideas in corporate finance have come and gone; however, it looks like ESG is here to stay. It is increasingly becoming an essential factor in the decision-making process for M&A, influencing how companies select targets for mergers or acquisitions. A study conducted by PWC found that poor ESG performance prevented a deal or affected their willingness to do a deal, with half expecting a discount for poor ESG performance. Scoring low on these metrics can negatively impact a firm's valuation and can be used as a lever in negotiations during the Sales and Purchase Agreement (SPA). On the other hand, strong positive ESG performance adds to the attractiveness of a company. Partnering with firms with a strong record of innovations or focus on renewables can enhance the ability to deliver long-term sustainable returns to shareholders due to synergistic properties. Take Fiat Chrysler’s pending merger with Peugeot, for example, which will help the firm avoid over $2 billion in European carbon emission fees. Additionally, with disclosure practices becoming increasingly ingrained into public companies, those who can showcase their ESG prowess give themselves a competitive advantage. By demonstrating their firm profiles, they can increase their attractiveness to potential acquirers looking to develop or supplement their capabilities. Similarly, companies with weak ESG profiles can deter potential acquirers due to the cost and difficulty of bringing the target company up to the trade buyer’s standard. Figure 1 clearly illustrates the increasing influence ESG factors will have over the next three years in M&A decision making.
ESG and Market Value Performance Post-M&A The attractiveness of the high-scoring ESG companies seems promising, and evidence suggests that the strategy is effective. A paper by Tampakoudis and Anagostopoula (2019), which looked at 100 M&A transactions in the EU, found that the ESG performance
Figure 1. The change in Influence of ESG Factors in M&A activities
of the acquiring firm increased following the acquisition of the target company with the superior ESG score. Similarly, the market value of the acquirer increased post-merger too. Interestingly, the increase in the market value occurred following an increase in the ESG performance of the acquirer post-merger, suggesting a positive relationship between the post-merger market value and the ESG score of the target.
Valuation and ESG A strong ESG profile can also increase the intrinsic value of the firm. A paper by Gregory et al. (2014) would suggest that companies with stronger metrics in these areas can increase profitability. Through the cash-flow channel, strong performance in ESG allows a firm to become more competitive. They can utilize their resources more effectively, better develop human capital, manage innovation, and form better long-term planning with stronger incentives for senior management. Subsequently, these firms can generate higher returns, higher profitability, and thus more significant dividends. Figure 2 illustrates how a strong ESG profile leads to a higher dividend through a greater competitive advantage and leading to higher profitability. Similarly, the valuation channel, governed by the firm’s exposure to systematic risk, also supports a higher valuation for firms with strong ESG scores. Companies with higher scores have less vulnerability to market shocks, lower betas, and lower expected cost of capital. Academic literature appears to agree
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FINANCE FINANCE with this, as high ESG scoring firms demonstrated lower exposure to the volatility of common risk factors and lower recent 5-year volatility of earnings compared to low scoring ESG firms. (Eccles et al. (2014)). Figure 2. How strong ESG profiles lead to strong valuations
Source: Lasse H. Pedersen, Shaun Fitzgibbons, Lukasz Pomorski, Responsible Investing: The ESG-Efficient Frontier, October 10, 2019
Figure 3. How strong ESG profiles leads to strong cashflow channel
Source: Lasse H. Pedersen, Shaun Fitzgibbons, Lukasz Pomorski, Responsible Investing: The ESG-Efficient Frontier, October 10, 2019
However, not everything is so green. Implementing ESG into valuations is not an easy task, as any measure of a firm’s environment and social goodness presents two key challenges. The first being that it’s difficult to quantify these areas, as much of the social impact is qualitative. Secondly, there’s an even greater difficulty for firms coming to a consensus around which social factors to consider and the weightings that should be attributed. Subsequently, there has been a lot of inconsistency with the ESG scores assigned to firms, even among firms whose entire job is to do so, there’s a lack of clarity in the rankings, as seen with the bar-chart below.
Conclusion It appears that ESG is not going anywhere anytime soon and will continue to play an increasingly important role in investing and M&A activity. Many proponents of the value of ESG point to the advantages it brings, such as improved ESG performance of the acquirer, reduced exposure to risk, or increased profitability. However, ESG may not necessarily be a miracle; it seems there is still some growing pain with this relative concept. The difficulty to place a numerical value on the qualitative metric has proved to be cumbersome. This brings various inconsistencies, increasing the difficulty to find the real intrinsic value of a company and a lack of suitable firms for comparison due to the industry's infancy. Additionally, it becomes easier to manipulate a valuation in favour of one party by attributing different weightings until one gets their desired result. Nonetheless, the future relationship between ESG and M&A will remain an interesting one. References Eccles, R.G., Ioannou, I. and Serafeim, G., 2014. The impact of corporate sustainability on organizational processes and performance. Management Science, 60(11), pp.2835-2857. Gregory, A., Tharyan, R. and Whittaker, J., 2014. Corporate social responsibility and firm value: Disaggregating the effects on cash flow, risk and growth. Journal of Business Ethics, 124(4), pp.633-657. http://aswathdamodaran.blogspot.com/2020/09/sounding-good-or-doinggood-skeptical.html https://alphaarchitect.com/2020/01/13/how-esg-affects-valuation-risk-andperformance/ https://corpgov.law.harvard.edu/2020/02/20/the-coming-impact-of-esg-onma/ https://www.unpri.org/private-equity/the-integration-of-esg-issues-inmanda-transactions/112.article Pedersen, L.H., Fitzgibbons, S. and Pomorski, L., 2020. Responsible investing: The ESG-efficient frontier. Journal of Financial Economics. Tampakoudis, Ioannis & Anagnostopoulou, Evgenia. (2020). The effect of mergers and acquisitions on environmental, social and governance performance and market value: Evidence from EU acquirers. Business Strategy and the Environment. 29. 10.1002/bse.2475.
Figure 4. Correlations across six different ESG providers
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Sustainable Business Review Green Economy Society Nottingham nottinghamgesoc@gmail.com
Sustainable Business Review, 2020. Published March 2021.