Policy important, but consumer preference key to sustainable returns

“We have seen a monumental shift in the way consumers act in recent years” explained Emilie O’Neill of Perennial Better Future when discussing the key factors set to drive returns in sustainability-focused businesses for decades to come.

On a recently released podcast, the dedicated ESG unit within Perennial flagged policy changes, cost of capital, technology and changing consumer preferences as playing a “crucial role” in generating strong long-term returns for investors. The comments amid a back drop of broadly weaker performance from those sectors traditionally associated with more sustainable investing, with the ‘old-world’ of commodities winning out in the short-term.

According to recent research, Perennial says some 85 per cent of people indicated that they are shifting their purchase behavior towards being more sustainable in the last five years alone. The choices can be quite small and barely noticeable, such as buying natural wine, organic food, solar panels or a new Tesla, but this is the beginning of a “monumental shift” in which consumers are “far more conscious of the conduct of the companies” they do business with.

“Policy has been an integral starting point for sustainability” explains O’Neill, however, as the lack of direction in some countries has shown, it isn’t the only factor that must be considered. “The industries and themes shaping sustainability will often need assistance at their inception” she says, and whilst this may start at subsidies it extends into building standards, modern slavery regulation and Net Zero commitments. London’s 2018 decision to ban the sale of combustion engines by 2030, was a case in point which effectively forced every major manufacturer to pivot to EVs.

With lower risk, whether in the form of environmental, social, governance or financial, should come a lower cost of capital, something McKinsey have confirmed from over 2,000 academic studies. In fact, their analysis suggests the stronger ESG scores can result in as much as a 10 per cent lower cost of capital.

Finally, is the role of innovation and technology, which has been key to making more sustainable technology like solar and wind energy more affordable and therefore lower cost to consumers. Products that have significantly benefited from an increase in greener technologies include batteries, led lights, electric car manufactures, wind turbines, solar panels, resource efficiency in agricultural practices, innovative treatment of recycling, water remediation.   

The key here is that most sustainability challenges aren’t necessarily localized, which means we are facing global issues, that attract global capital flows. That isn’t to say the ASX isnt heavily involved, with O’Neill highlighting the likes of Calix, a leading sustainability technology provider operating across mining, agriculture and water sectors.

Staff Writer