Experts Say ESG is Here to Stay

The incoming Donald Trump administration has an opportunity to unravel U.S. federal energy policies that support and accelerate decarbonization, but making the most of that opportunity will be a difficult task. Globally, businesses have already begun integrating systems that treat sustainability as a necessary business practice, not a dispensable afterthought.

“Sustainability is not going away”

The German technology firm SAP is a good example of new momentum in the sustainability field. It is widely recognized as the leading developer of enterprise resource planning (ERP) software, which integrates all elements of a business into a unified platform for decision-making. About 80 percent of global GDP passes through SAP software on a daily basis.

TriplePundit spoke with SAP Chief Sustainability and Commercial Officer Sophia Mendelsohn at the company’s Hudson Yards offices in New York City last month to gain some insight into what lies ahead for the corporate sustainability movement over the next four years.

Mendelsohn described how the sustainability profession has transformed over her 22 years in the field, moving from a relatively narrow focus on local pollution to a holistic embrace of corporate responsibility and ESG (environmental, social and governance) principles. She characterizes the move toward sustainability in business as a permanent one, no matter which way the political winds blow.

“Sustainability is not going away,” she said, emphasizing that investor awareness of climate risks is driving the decarbonization movement. 

The consumer baseline has shifted, permanently

Businesses are also responding to trends in public approval for sustainable and ethical commerce. Mendelsohn frames public sentiment as a “social license to operate." She observed that the baseline for social license to operate has shifted significantly since her early years in sustainability when “consumers won’t pay more” was a common refrain.

Today, more consumers are willing to pay. In a survey last spring, for example, the global professional services firm PwC found a strong connection between climate awareness and consumer behavior. More than 80 percent of those surveyed were willing to pay more for products they deemed more sustainable, despite the pressures of inflation on household budgets.

Green accounting and the sustainability momentum

SAP has been integrating carbon accounting into its ERP software over the years, and it took another significant step forward last month with the integration of the SAP Green Ledger. The new tool is designed help companies meet the demands of new and emerging carbon accounting regulations in the European Union and elsewhere.

In contrast to conventional carbon accounting systems that provide averages, the Green Ledger enables companies to track the carbon footprint of each financial transaction, enabling them to quickly pinpoint potential challenges and opportunities within their inventory. Essentially, it applies the precision of financial accounting to carbon accounting.

Deloitte recently profiled the Green Ledger as an example of the green accounting trend. “Green accounting is becoming a strategic imperative, offering CxO’s [C-suite executives] a mechanism to successfully navigate increasing regulation, seize opportunities and fortify resilience in the face of environmental risks,” Deloitte analyst Brian Jobe observed in a recent blog. 

Enterprise resource planning software systems like SAP's function as a time saving platform that can “free the sustainability team” to spend less time working on carbon accounting formulas and more time doing what they do best: working face-to-face with customers, clients and other stakeholders to plan and implement action steps around the findings, Mendelsohn said. 

ESG is here to stay

Coincidentally, TriplePundit’s visit with SAP in December occurred on the same day as an investor conference hosted by Bloomberg Intelligence in New York. Titled, “ESG is Here to Stay,” the conference echoed many of the points raised by Mendelsohn, as companies seek to address the global regulatory environment.

“The U.S. government can’t protect U.S. companies from EU regulations,” Samantha Elliot, a CSR/ESG Associate with the leading firm Ropes & Gray, told the gathering.

Michelle Dunstan, chief responsibility officer of the global asset management firm Janus Henderson Investors, added that her firm integrates ESG principles in all aspects of its operations as a matter of sound financial practice.

“This is not ‘values investing,’” she emphasized. “It’s not touchy-feely. These are things that impact cash flow.”

Also speaking at the conference was Nancy Mahon, chief foundation officer and foundation president at Estée Lauder. She described ESG investing as “patient capital” that drives long-term value.

In the U.S., the state of California provides a living example of the “patient capital” perspective on ESG investing. In its latest data review, the nonprofit organization Next 10 found that the state cut its carbon emissions by 22 percent in just 16 years while the economy continued to grow. “Emissions per capita have dropped by 23 percent while state GDP per capita increased 38 percent since 2006 — showing that California can both make progress on climate and grow the economy,” Next 10 concluded.

If California was its own nation, it would be the fifth-largest economy in the world, providing further motivation for both domestic and global businesses to follow the state’s lead on sustainability and decarbonization.

The next four years promise to be a challenging one for climate action advocates in the U.S. However, the global nature of 21st-century commerce will continue to drive private-sector progress on decarbonization, regardless of who occupies the Oval Office.