ESG Investing For Dummies. Brendan Bradley

representing US$16.2 trillion in assets under management and coordinated by two organizations — Principles for Responsible Investment (PRI) and Ceres — demanded that companies take urgent action due to the destructive fires in the Amazon, which were partly due to the accelerating rate of deforestation in Brazil and Bolivia. They argued that deforestation and loss of biodiversity not only are environmental problems but also have major negative economic consequences that need more effective management of agricultural supply chains. In addition, large corporations have been wary of the reputational risk if their supply chains are linked to these issues and have pledged to exclude deforestation from their supply chains. Meanwhile, pension funds are considering divesting holdings in transnational commodity traders operating in such countries. As a result, it’s likely that they will need to shift to deforestation-free methods in the future.

      Don’t throw your future away: Waste management

      The traditional model of waste management is changing. Collection methods, waste-to-energy solutions, and innovations are all essential elements directing us to a circular economy model (an economic system aimed at eliminating waste and the continual use of resources). Focus on waste is impacting all companies that produce products, and they all need to consider how they take greater ownership of the waste they produce throughout their production cycle. As populations have grown and urbanization has increased, the work of waste management companies has become increasingly vital. The market size of global waste management is anticipated to grow at a compound annual rate of 5.5 percent from 2020 to 2027, becoming a US$2.34 billion marketplace (go to www.alliedmarketresearch.com/waste-management-market for more information). The market can be broken down into municipal, industrial, and hazardous wastes, where collection and disposal services are provided. The collection services include areas such as storage, handling, and sorting, while disposal services focus on landfills and recycling.

      

The key mantra of waste management companies should be to take care of the environment by managing and reducing waste (some refer to this as the 3Rs: the reduce, reuse, and recycle approach). Their main objective, assuming a sustainability focus, is to reduce and reuse waste materials wherever possible, thereby avoiding further waste, minimizing pollution, and endorsing recycling. Ideally, they should encourage waste-to-energy development by converting waste to energy when it’s not recyclable. Finally, they need to ensure and promote proper solid waste management, especially when removing and safely managing toxic or environmentally harmful materials like solvents and industrial waste.

      However, the continuing introduction of new legislation and regulation will drive new policies that will demand new technologies and products, particularly in helping to achieve net-zero carbon emissions and to protect biodiversity. Governments have played a key role in many OECD (Organization for Economic Co-operation and Development) countries by providing support for waste management investments, including grants, loans, and tax exemptions that support investments made by businesses and specialized producers. But major investments in a range of new technologies will be required, such as chemical recycling and turning residual waste into fuels and chemicals, while new systems of data collection will be needed to monitor the fulfillment of obligations.

Studying the Effects of a Company’s Operations on the Environment

      Businesses don’t operate in a vacuum. In a global economy reliant on cross-border trade, convoluted supply chains, and diverse workforces, companies are constantly challenged by environmental issues as well as product safety and relationships with regulators and local communities. Therefore, managing these factors is simply part of maintaining a competitive advantage in today’s economy.

      A company needs to use best management practices to avoid environmental risks and capitalize on opportunities that produce long-term shareholder value. Where companies earn excess profits by externalizing the cost of environmental and social issues upon the communities in which they operate, investors risk paying the price when this is corrected, and costs are internalized to the company’s financial statement. In recent years, shareholders have experienced considerable losses following the negative environmental impacts of oil spills, mine explosions, and unsafe products. While there isn’t just one solution to circumvent such catastrophes, identifying material environmental impacts and mechanisms to reduce these can help mitigate risks and even identify new opportunities.

      The following sections discuss two working areas of a company’s impact on the environment: direct operations and supply chains.

      Direct operations

      Evaluation of environmental issues can reduce costs by, for example, minimizing operating expenses (such as raw-material costs or the real costs of water and carbon). Therefore, when analyzing the comparative resource efficiency of companies within given sectors, investors should look for correlation between resource efficiency and financial performance. Studies suggest that companies with more developed sustainability strategies will outperform their peers. One approach is to integrate environmental policies into their operations strategy and functions, incorporating operations such as product design, technology choice, and quality management. Companies that don’t acknowledge the consequences of environmental problems on the operations function may not succeed in the future in a competitive market, so this element of operations strategy needs to be aligned with the corporate strategy.

Large companies are transferring sustainability from the bottom line to the top line. They are becoming more sustainable and implementing changes tied to their direct operational control. For example, strengthening distinctive competence in terms of operations objectives contributes toward a competitive advantage. The environmental properties that an organization can control determine whether a particular activity, product, or service creates emissions, waste, or land contamination. Other issues that a company may be able to influence include the environmental performance or extended life of product design, minimizing the use of material resources and energy in packaging, and improving the biodiversity of land use.

      

Therefore, organizations should ensure that environmental inspections are undertaken on a regular basis to mitigate factors that could impact the company. While larger companies have more resources for such activities, it’s equally important for small and medium-sized businesses to consider the influence of external factors on operations, as they may be more vulnerable to such issues. Moreover, this helps organizations take advantage of opportunities before their competitors, tackle issues before they become substantial problems, and support plans to meet shifting demands.

      Supply chains

      Companies can’t always control indirect environmental factors, such as those in the supply chain, but they can influence suppliers and users to reduce, minimize, or eliminate the impacts that are caused. Sustainable procurement is firmly on the agenda, and companies don’t want to be linked to suppliers with questionable business models, as this generates negative media coverage. Many firms have implemented a supplier code of conduct that requires suppliers to follow the core principles of the UN Global Compact (see Chapter 1) within the areas of human rights, labor standards, environment, and anti-corruption. Suppliers are obligated to impose similar principles on their suppliers.

      In many industries, the vast majority of issues around sustainability are external and related to providers across the supply chain. In particular, for companies in some industry sectors, suppliers’ operations are responsible for over two-thirds of a company’s total CO₂ emissions. Large, multinational companies are the ones looking to improve on this the most, as they realize the importance and weight that supply chains have, and their priority is in finding ways to hold their suppliers accountable. Many have begun to apply a risk-based approach, where they focus efforts on areas with