Organisations throughout the world are navigating a volatile and complex business landscape. Boards are contending with heightened geopolitical tensions and an uncertain economic outlook. In addition, sustainability is an ever more prominent issue.
Organisations’ stakeholders — including their customers, employees, investors, policymakers and regulators – expect them to play their part in tackling today’s major environmental and social challenges. As a result, boards may need to rethink how they allocate capital to both new and existing businesses, according to EMEIA board priorities 2023.
Over 11,000 businesses and other organisations have now committed to net zero targets, with the aim of achieving net zero carbon emissions by 2050 at the latest¹. However, many are struggling with the challenge of transforming their business models to be more sustainable while avoiding value destruction. This is leading to the adoption of value-led sustainability strategies where businesses create additional value through the launch of new and sustainable products and services, while conserving cash and resources. All capital projects are now expected to generate cash more quickly as they rush to preserve value amidst concerns around high interest rates.
Keeping funding channels open with the right ESG scores
Investors are alive to the opportunities presented by the net zero transition and are keen to play their part in funding it. Overall, the transition to a net zero economy is estimated to require US$125 trillion in investment globally by 2050². According to research by Bloomberg Intelligence, ESG assets already represent more than a third of the total assets under management (AUM) and may reach US$53 trillion by 2025³.
On the flip side, boards must be conscious that a poor ESG rating can act as a barrier to outside investment as the ESG reports from rating agencies are used by investors to inform their capital allocation decisions. Organisations without strong ESG scores are likely to be excluded from ESG funds and indices.
Organisations and investors need to work together to ensure that capital is channelled toward those investments that are likely to have the greatest impact on achieving net zero ambitions, thereby bolstering those critically important ESG ratings. Comparable, reliable and transparent sustainability reporting will help both boards and their investors get a more accurate picture of which investments are doing so. New regulations such as the EU Corporate Sustainability Reporting Directive (CSRD) will assist in this regard.
Boards also need to be aware of other sources of capital such as the EU Green Deal and the US Inflation Reduction Act which can provide funding for sustainability related initiatives and projects.
Understanding investor expectations and rethinking roles
In this new paradigm, boards need to work with the management to identify the major trends in ESG investment and understand how they are likely to impact the organisation's ability to secure funding. They must also take steps to ensure they are capable of influencing their organisations’ capital allocation decisions.