In his TED talk, Chris McKnett highlighted in great detail the numerous advantages enjoyed by corporations and businesses that actively engage in environmental and social governance. Occasionally, he referred to examples of companies such as Pentair that have seen the urgent need to engage in environmental and social governance as a means of achieving sustainable earnings into the future. Among the issues that he addressed, I found the issue on natural resources depletion and specifically the food issue as the most sensitive. He explained how the population is growing exponentially and already consuming more resources than it is replenishing and that if this trend continues, the future is likely to be dull. The issue on how Pentair sold their core power tools business to venture into the water business also got my attention because he clearly showed how demand for clean water is likely to grow rapidly from the over four billion middle class people across the world.
This information impacts my thinking in many ways. First, he demonstrated that the stock performance of companies that had embraced environmental and social governance was just as good as and at times better than that of those that did not. From a financial perspective, there exist a positive correlation between stock performance and earnings and hence this may be interpreted that the companies performed similarly to or better than those that ignored environmental and social governance. There is much logic in the talk because companies should not only aim at increasing their earnings and market share but also aim at having quality earnings. Quality earnings are only achieved if they are easily replicable and if they are sustainable to a reasonable period into the future. In order to create value in a company, the three forms of capital are required i.e financial capital, physical capital and lastly human capital. A combination of these three types of capital yields outstanding results over the long term only if environmental and social governance is implemented.
Technology can be used to solve the problem of sustainability of production by firms. With the advancement in science and technology, matters of sustainability are slowly being solved for instance in agriculture, science has enabled the yield of better crops that mature faster and hence food sustainability in future may heavily rely on science advancement. Scientists hold the key to sustainability in most processes that involve the use of biological resources. Some materials used in production can now be synthesized in laboratories in case their natural forms are exhausted which means that sustainability can be achieved albeit at a costly price in terms of financial, physical and human capital. The other key to sustainability is waste reduction by making sure firms use the available resources in the most efficient way.
Chris McKnett: The investment logic for sustainability Web. 24th Feb 2014