CHICAGO—Treasury and finance professionals who focus less on short-term earnings and more on big environmental and social challenges will be the ones who come out ahead in the long run, argued author Andrew Winston, opening keynote speaker of the 10th Annual CTC Corporate Treasurers Forum.
Speaking to a crowd of more than 100 treasury and finance executives, Winston, author of the “The Big Pivot,” said business has reached a tipping point in which companies can no longer simply react to environmental change and must be more proactive if they want to remain competitive. If companies make “a profound change in strategy, tactics and philosophy—that will make their organizations more resilient and flexible in a volatile world,” he said.
Winston cited a recent HSBC study, which found that there is an annual global investment of about $250 billion in sustainability and expects it to be a $2.2 trillion market by 2020. Winston actually believes this number is too low. “We’re talking about deep changes in multitrillion dollar industries—buildings, transportation, energy, water systems, consumer products, finance, etc.” he said. “In fact, we’re already invested [$250 billion] globally in building this clean economy.”
The shift in the clean economy has not gone unnoticed by the investment community. Winston noted that Barclays actually downgraded the entire U.S. electric utilities sector to “underweight” in its bond portfolio due to the rise of solar power. Fully 80 to 90 percent of the energy put on the grid in the U.S. in the first quarter was solar and wind.
“Renewables have already won,” Winston said. “They’re just going to take a long time to be the dominant source of power, because we have such a giant system. They’ve already won the economic argument,” he said.
Furthermore, the world is more open and connected than ever before, and public scrutiny on businesses and individuals will continue to increase. “What this means is that companies can’t hide; everything about their operations is open,” Winston said.
Consumers and businesses who make purchases are asking where products are coming from, where they are made, what the companies’ carbon footprints are, etc. “The financial community is asking more questions,” Winston said. “The Carbon Disclosure Project (CDP) started as a small thing about 10-12 years ago. It’s now backed by $87 trillion in institutional investors. It’s a questionnaire that goes out to all of you—all of the largest companies in the world. And almost all of you are answering these questions about carbon and energy use.”
The world is also becoming more expensive to operate in, Winston said. The rise of the middle class in China, India and other nations is a great success story for human development, but it also means that people are consuming more.
“The demand is rising relentlessly,” said Winston. “There are going to be 9 billion people, and they want more. That’s good for all of our businesses in a sense; there are new markets. But it also means there’s not enough stuff. The demand for everything going into our society—metals, oil, energy, wheat and food—is rising.”
Companies are waking up to this, although not as quickly as one would hope. PwC recently did a survey of CEOs on whether they are concerned about these issues. Nearly half were concerned about commodity prices, energy, etc. “I think these numbers should be at 100 percent, given the data,” Winston said. “These numbers are not future projections; they are what has already happened over the past 10-12 years.”
This is being reflected in company bottom lines. “Coca-Cola announced a few years ago that they would spend over $800 million more that year on commodities, which meant corn,” Winston said. “Cotton went up 300 percent in just a few years ago, forcing apparel makers to make a hard choice. You either have to pass along those costs and effectively take a hit to revenues, or you have to take a hit to margins.”
A hotter world
In addition to the world becoming more expensive, it is also becoming hotter. Extreme weather and extreme heat are becoming the norm.
This leads to carbon and the stranded assets problem, and issue that business really need to know about, Winston said. “There is this very real concern that, if we want to hold temperatures in the world to a certain level, we can only burn so much carbon,” he explained. Unfortunately, oil, gas and coal companies have three to five times that much carbon in reserve. “Think about what that means; if we don’t burn it, half of their value is gone.” And if it is burned, then temperatures might rise above levels that are safe.
Winston noted that Exxon and Shell put out statements recently that they do not believe this as a problem. “I think that’s a mistake for anybody investing in this sector,” he said. “I’m not going to tell you that some asset class is going to be worth less or more than another, but the world is starting to come after carbon very aggressively.”
Just last week, President Obama introduced a new rule that would reduce carbon emissions from power plants by 30 percent by 2030. “We’re already halfway there actually,” Winston said. “It’s not as aggressive as it sounds. The economics of renewables are already pushing us down this path. But these are serious changes in the asset value of this sector—the most valuable sector in the world—and it’s not going to be worth as much unless they make a very big shift in their business.”