Should a company’s responsibility begin and end with shareholders, or extend to customers, communities, and the environment?
While hardly an original question, last year saw a renewed focus on debate around the purpose of business — and with sustainability already in the January headlines, from fires in Australia to new figures on climate change, expect it to be a major topic for business leaders in 2020.
We now have just 10 years to achieve the Sustainable Development Goals (SDGs), the UN-designated blue-print of a sustainable future. Fortunately, business is ready to embrace the challenge. According to HSBC’s Navigator research, 75 per cent of UK businesses recognise their role in achieving the SDGs — higher than any other European country, and significantly above the global average of 63 per cent.
This matters, because the world needs the business community’s help. Global progress towards the targets is nowhere near on track, and the window for action is now. And that progress depends on rethinking the way we define businesses’ purpose.
Businesses have always existed to create value, but what constitutes value continues to evolve. Whereas once it was narrowly measured in terms of pure profit, in recent decades this has broadened to measure total shareholder return.
Today, there is an emerging recognition that “value” increasingly reflects a more holistic view, incorporating the full financial, social and environmental impacts of a business, from sourcing to production to disposal, and recognising that supply chains are responsible for 90 per cent of companies’ environmental impact.
The ambition to do more on sustainability is a common theme of my conversations with clients, but they are often held back by practicalities. Two key challenges crop up time and time again that require collaborative action from businesses and policymakers.
The first is measurement. A broader definition of value creation demands improved measurement. HSBC’s survey shows that businesses are frustrated by inconsistency in environmental, social and governance (ESG) criteria. There is a gap between indicators that companies state as relevant and those that they measure. Common frameworks and standards can unleash action by enabling peer comparison, and channeling the resulting competitive pressure to drive progress.
Greater transparency and measurement would also address the second challenge: finance. This is identified as the largest barrier to becoming more sustainable — an additional annual investment of $2.5 trillion is required to meet the UN goals.
Here, banks can act as a catalyst for action. HSBC launched the first SDG bond in 2017, with proceeds ring-fenced for projects aligned to seven selected goals, followed in 2018 by the world’s first SDG sukuk, a sharia-compliant bond. This reflects a significant turn towards sustainable investment.
If business value increasingly reflects return to society, it follows that wider societal factors will inform financing decisions. Efforts to improve the disclosure of risk relating to climate change across the financial system indicate a clear direction of travel. In time, SDG performance will be a factor that informs financing decisions.
That means that businesses which fail to recognise their own role in meeting the SDGs will be left behind. In the short term, society, regulators and competitors are increasingly alive to these issues, posing risks to companies which drag their feet. Longer term, they could be missing out on opportunities too, as achieving the UN goals could unlock $12 trillion in new market value and create 380m jobs.
Change is often gradual, then sudden. As engagement rapidly spreads, from school-age activists around the globe to the boardrooms of the UK’s largest companies, this feels like a tipping point. With just 10 years to go, the prize is there to be won by business leaders who adjust their purpose, rethink their ideas of value, and help build a sustainable future.
Main image credit: Getty