x Abu Dhabi, UAESaturday 20 January 2018

Companies with green strategies most likely to grow

Investors now regard a company's green credentials as a benchmark for the organisation's future sustainability and growth.

Although the green investment market is developing fast, what constitutes a truly green investment is still being debated. For example, does a company in a traditionally non-green business, such as oil production, become "green" if it tries to adopt a more eco-friendly approach?

In this bi-weekly column, I will try and shine a light on the grey areas of this new and growing investment medium. I shall also, of course, endeavour to identify the most potentially lucrative areas of green investment.

The green investment market is becoming increasingly sophisticated. When companies adopt a green strategy, it is no longer done as ecological window dressing. Investors now regard a company's green credentials as a benchmark for the organisation's future sustainability and growth.

According to Warren Wilson, an analyst at the research organisation Ovum: "Most businesses don't invest in 'green' solutions for altruistic reasons but because they're required to, or because these solutions will improve business results. And shareholders increasingly prefer companies with well-formed sustainability strategies, because they see that sustainability will only become more important to business success over time."

Green investment is, therefore, no longer the province of purely idealistic investors. Instead, it is also for those who are interested in buying shares in companies with realistic prospects for sustained future growth.

"Sustainability means efficiency - adopting more efficient processes can reduce energy costs and wastes, and also can deliver top-line improvements by strengthening the brands of those companies that are committed to the green economy," Mr Wilson says.

He adds: "One example is Seventh Generation, a company that specialises in household goods such as toilet tissue and laundry soap that are designed for minimal environmental impact. We are also seeing public commitments from companies like Procter & Gamble, Unilever, Dell and HP. All have made commitments towards reducing their carbon footprints."

According to Len Sauers, vice president for global sustainability at Procter & Gamble: "P&G has a long history of sustainability - one that we can trace back over 50 years. It was in 1956 that we published our first paper evaluating the environmental safety of the products we were using at the time. We pioneered the concept of life-cycle development. We are also the ones who developed methods to evaluate the biodegradability of chemicals."

P&G has also announced that it has the goal of using 100 per cent renewable or recycled materials for all products and packaging as well as powering all the company's power plants with 100 per cent renewable energy. But the company admits it still has a long way to go in terms of environmental sustainability.

"By 2050, we estimate that there will be nine billion people on the planet. P&G will have to change to meet the challenges of solid waste, climate change and water availability," Mr Sauers says.

The reason leading corporations such as P&G are broadcasting their green credentials so loudly is simple - the pay-off for companies that publicly make this type of commitment is often more customers and revenue.

With the public increasingly aware of environmental issues, companies with sound credentials can look forward to growing revenues. According to Mr Wilson: "It is good business because consumers are increasingly interested in buying green products, although our survey data show that most are not yet willing to pay a premium for them."

But there are more commercial advantages to going green than merely attracting politically correct customers. Green analysts report a growing body of evidence that supports the theory that companies with a green agenda will, over time, overtake those organisations which do not. The logic underpinning this investment strategy is that having a well-executed green strategy means cost savings and increased business efficiencies in the medium-to-long term.

"Sustainability also makes sense as an element of core business strategy - making core processes as efficient as possible, minimising emissions and waste streams that carry legal penalties, that kind of thing. It also can mean minimising reliance on materials that are scarce or subject to wide swings in price and availability," Mr Wilson says.

One example of such materials are rare earth elements.

For example, China is a primary source of rare earth elements but has already evidenced a willingness to restrict supplies to other countries when it serves its geopolitical interests. A prime example of a rare element is tantalum, which is widely used in electronics products such as mobile phones. The downside is that tantalum is available in geographical areas suffering from political disruption. "The Congo is a primary source of tantalum and tantalum smuggling has been fuelling the ongoing conflict there," says Mr Wilson.

"Tantalum is subject to supply disruptions, and its use raises ethical questions of increasing importance to consumers and investors. So, minimising the use of such materials protects the business from a supply chain point of view, and also from a brand and image point of view."

While western investors and corporations have so far been leading the green revolution, other regions are catching up. For example, energy forecasts suggest that by 2050, approximately half of the Middle East's required energy will come from renewable sources.

The Middle East is estimated to receive 3,000 to 3,500 hours of sunshine a year, making the region a potential model of sustainability. For example, Masdar City, now being created on the outskirts of Abu Dhabi, is being designed to offer the world a model for energy-efficient 21st-century cities.

However, Middle Eastern companies that do not take issues such as environmental sustainability seriously may find it hard to retain a loyal investor base.