ESG and finance: Sustainability attracts capital
Investors and consumers are increasingly taking a closer look at how companies approach sustainability. That’s a good thing, says Hydro’s Chief Financial Officer, Pål Kildemo.
There is a strong relationship between sustainability and profitability. Governments, non-governmental organizations, manufacturers, consumers and not least, investors, are making decisions based on sustainability. As they do, companies that respond efficiently will be winners.
ESG – environmental, social, governance – topics are at the forefront like never before, and Hydro has declared it wants to be an industry leader. With renewable energy and robust recycling activities powering greener processes and products, Hydro is well-positioned.
So, how does a company like Hydro combine sustainability and profitability?
“Typically the thoughts among many finance and economy people have been that finance or profitability and sustainability don’t necessarily go hand in hand,” Kildemo says, “and I think it’s because many business cases for investment with a longer-term aspect are not as easy to calculate as more traditional ones, which may be less sustainable. But in the longer term, there is probably a strong relationship between profitability and sustainability."
As sustainability moved from regulatory frameworks to the marketplace, consumer interest in sustainable products has led to a greater willingness to pay for products which are sustainable. “That definitely has made it easier to combine the two elements. There has also clearly been a change in investor interest in sustainability," Kildemo says. Kildemo sees more and more investments being driven by sustainability, thus challenging companies to rethink their actions.
“It can typically be related to what plans do you have within all the different UN sustainability criteria? What are you doing for climate? What are you doing for employment, for schooling. It's across the board. There's been a huge increase in skill there.”
How do you know what actually is a sustainable investment?
“That is one of the most difficult questions,” Kildemo acknowledges. "You would think that it is easy to say that this is either sustainable or not sustainable. But what might be sustainable for one company is not necessarily for another.
“If you look at Hydro. We are emitting CO2 from our smelters and if you were to only focus on that part of our operations as an external party, you might deem us a non-sustainable company. But we produce hydro power and we produce aluminium based on hydro power, which has a completely different footprint from a lot of the world's operations, which produce based on coal.
“So in that manner, you would say, ‘Well, maybe Hydro is a bit more sustainable than a coal-fired producer.’ And then you have the full life-cycle aspect, our products, they are lighter, they reduce weight when put into cars, they're infinitely recyclable. If you put that into the equation as well, then there is also the aspect that aluminium is more sustainable than other types of material.
"In addition, there is a “virtuous circle” in sustainable finance. If the idea is to drive change toward more-sustainable behavior, and companies are rewarded with investment capital, companies will be encouraged to be more sustainable.
“You could say that there's a lot of passive capital sitting around these days,” Kildemo says, “and basically if that capital were to be invested with sustainability in mind, then that capital could influence decisions made in boards or other arenas to ensure that the companies change.”