Strategy & Sustainability Director, Robert Haigh, considers the importance of finance and sustainability.
Last month, we celebrated the 54th anniversary of Earth Day. 2023’s theme is ‘Invest in our Planet’. Highlighting the link between finance and sustainability is timely and essential, but the message isn’t a new one. Investors, CFOs and CEOs have been told by campaigners, NGOs, and sustainability teams for years that committing financially to sustainability is both the right thing to do and a business imperative.
However, a sticking point has been that without articulating the case in financial terms, enabling evaluation of business cases and return on investment analysis, it can be difficult to justify the kind of investment that is required to shareholders.
Brand Finance has sought to solve this challenge. We have quantified the financial value of sustainability perceptions for hundreds of the world’s biggest brands. Our research, first launched at the World Economic Forum in Davos earlier this year, shows that even for individual businesses, there can be billions of dollars of financial value to be gained from enhanced action and associated communication. Equally, there can be billions at risk from insufficient action.
Sustainability Perceptions Value
Amazon has the highest sustainability perceptions value of any brand, US$19.9 billion. This may come as a surprise to some. It is important to reiterate that Amazon’s position at the top of the index is not an assessment of its overall sustainability performance. Instead, we are focussed on perception. Amazon may not be perfect, but consumers appear to have confidence that it is committed enough to minimising impacts for them to continue to use its services.
This should not be seen as a cause for complacency however. Consumer expectations may change in response to exposes, enhanced reporting requirements, education, and media coverage. If Amazon fails to keep pace through a precautionary approach to improving its sustainability performance, and honest communication about its progress, those billions of dollars of value could be at risk.
Gap Analysis
In fact, there are many brands where value is indeed at imminent risk. In addition to perception, we have re-run our valuations for each brand based their relative ESG performance (using data from CSRHub). The difference in the values for each brand reveals whether perceptions are aligned with the ‘reality’ of performance.
Where performance exceeds perception, there is an opportunity to rapidly generate value, by communicating the brand’s genuine commitment to sustainability more effectively. Conversely, where perception exceeds performance, value is at imminent risk, as brands leave themselves open to public backlash and a ‘correction’ of their sustainability perceptions value.
Sector Sustainability Driver Scores
Tesla has the highest proportion of value underpinned by sustainability perceptions of any brand (26.9%) resulting in a sustainability perceptions value of US$17.8 billion. Tesla is of course well known as a pioneer of the electric vehicles and battery technology that are aiding the transition to a lower carbon economy. This image has clearly carried across into the perceptions held by global consumers.
Tesla wasn’t the only premium auto brand for which sustainability plays a powerful role. The average role of sustainability in driving choice in the luxury auto sector is 22.9%. It might seem counterintuitive that brands often associated with high fuel consumption are reliant on a reputation for sustainability. However, our research has found that at the premium end of all sectors, sustainability plays a powerful role. In luxury auto, where the purchase is discretionary and the brand is publicly expressed, the role of sustainability is further enhanced.
Other sectors in which sustainability plays a powerful role are soft drinks (13.7%), supermarkets (12.6%), media (10.1%) and cosmetics (10%). For soft drinks and supermarkets, the potential impact of the products in question is a lot more tangible for consumers than in many sectors, be it plastic pollution, deforestation, or food miles. In cosmetics, many brands have for decades focused marketing communications on the ‘natural’ qualities of their products and avoidance of animal testing.
Sustainability Sub-driver Scores
There is also variation in the roles of the sub-elements of sustainability, i.e. environmental, social, and governance concerns. Sustainability plays a similar overall role in the Household Products and Media sectors, accounting for around 10% of choice in each, however this is where the similarity ends.
For household products, a commitment to protecting the natural environment is the strongest driver, at 4.3%. Its governance and social driver scores are 3.2% and 2.4% respectively. The potential environmental impact of household goods via chemical runoff, plastic waste and transport emissions, that are of increasing concern to consumers help to explain this. In contrast in the media sector, the environment is of relatively limited concern (2.3%), while the governance and social drivers have a more powerful role. Concern over media bias, political influence and fake news could be helping to drive this.
Sustainability Perceptions Scores
As part of the analysis, we evaluate how sustainable each brand is perceived to be, allocating a ‘Sustainability Perceptions Score’ which allows us to see which brands, regardless of their financial scale, are seen to be sustainability champions in their respective sectors, and whose financial performance is particularly dependent on this.
On this measure, Tesla, IKEA and Patagonia performed well across a wide range of markets. Lush and The Body Shop scored very highly in the UK. In France, Yves Rocher and tyre brand Michelin stood out, while Brazilian cosmetics giant Natura scored highly in its home market.
Conclusion
The only way we will affect the change required to meet the challenges of climate change and biodiversity loss is if capital is mobilized in sufficient volume. For that mobilisation to happen, the case needs to be clear. We hope our research is another compelling piece of evidence to help you make that case within your own organisation and with the organisations you work with. If you’d like to know more, please get in touch at enquiries@brandfinance.com.