When will the ‘sustainability market’ take off? It’s a question we get asked all the time at Verdantix. To answer it, we speak to global budget holders and build country-level models to forecast corporate investment trends. Our surveys and models point to a sobering conclusion: corporate sustainability spending in most countries, both developed and emerging, will grow in the mid-single digit range for the next three years. So what is happening to sustainability budgets? Right now, there is no broad trend towards transformational programmes like Novellis Recycling and Umicore. And while the usual suspect brands constantly reappear on the conference circuit, few of their competitors are following them. Corporate marketing has created a huge perception gap between real spend and actual spend on sustainability.
Why are CFOs not reaching eagerly for their cheque books to fund products using recycled materials, on-site solar, EV charging stations, enhanced EH&S software, innovative sustainability communications campaigns and sustainable supply chain initiatives? Perhaps because, right now, there’s only limited pressure to do so. Energy prices are stable in many countries and not yet high enough in others like Germany or the UK to overcome the status quo in energy management. Water is frequently free or provided at such low cost that the focus is entirely on risk avoidance. Non-financial reporting requirements from stock exchanges are not backed up by enforcement. Only long-term investors such as Calsters and Calpers are asking CFOs questions about sustainability. Elsewhere, the proven business case for significant investment in business change is absent.
It’s not all bad news, though. In some areas spending is increasing. In the US, assurance work of GHG data has spiked up in response to the US EPA’s mandatory GHG reporting rule, which affects around 7,500 large facilities. Also in the US, the SEC Final Rule On Conflict Minerals, which requires firms to report by May 31, 2014 on their use of conflict minerals in the manufacture of their products, has started to trigger a wave of spending on supply chain audits and product life cycle assessment. This will ramp up investment in sustainable supply chains in the consumer electronics sector, which has already been an area of activity for Apple and HP. In Australia and the UK, mandatory reporting on carbon emissions will result in an uptick in spending on carbon management advisory services.
But until credit supply reverts back to normal, global GDP returns to trend and natural resource costs put pressure on margins, CFOs at most firms will not prioritize investments in resource productivity with a payback beyond two years. Based on the econometric analysis of banking crises in This Time Is Different, a return to trend is unlikely before 2015. In the intervening two years, one off regulations – the London Stock Exchange GHG reporting rule which is a listing requirement; the King Code in South Africa; the SEC’s Conflict Minerals rule; and the effects of super storm Sandy are just some examples – will release lumps of spending. But this will do little more than respond to short-term compliance pressures and one-off risks given the economic headwinds.
Image courtesy of StockMonkeys.com, Flickr
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