Disrupting the Blue Ocean
Article originally published in Real Deals magazine May 2020.
Matt Farnsworth, Technical Director, talks ESG and impact investment and adding value through sustainable business innovation.
Imagine you could invest in a company that was aligned with the buying preferences of over 80% of online consumers. You would be forgiven for being a little sceptical. Yet, data from Nielsen’s Global Consumer Confidence Survey in 2017 demonstrated that over 80% of surveyed online consumers felt strongly that companies should help to improve the environment, with 73% definitely or probably changing their consumption habits to reduce their environmental impact. That makes for a powerful change agent for brands.
Over recent years, consumers seeking sustainable products and businesses have increasingly been disrupting the status quo, with Millennials, Gen Z and Gen X being the most supportive, albeit with older generations not far behind. Part of the drive amongst consumers is a heightened understanding of how and where products are made, challenging businesses on transparency and the reality that by 2050, the world will be home to an estimated 9 billion people. OECD figures report that this future world is projected to require 80% more energy, with a 50% increase in greenhouse gas (GHG) emissions, 55% increased demand for freshwater and 70% (FAO) more food. Consequential impacts will also be felt in biodiversity due to agricultural land use changes and in freshwater systems, where over one third of biodiversity has been lost.
By this time and prior to Covid-19, world GDP was set to increase 400% (in real terms) according to OECD and the while short term growth prospects understandably remain highly uncertain, even with a projected lowering of 2.4% of GDP, future growth will undoubtedly impact on our ability to fuel our appetite for energy, food, water and consumer goods.
“We can expect socio-environmentally aware companies to disrupt traditional business models - widening the gap between the sustainability innovators and the traditionalists.”
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Innovating for change
This desire for continual capital growth has brought us here and without undertaking significant transformative change we collectively risk over- stressing systems, depleting resources and increasing the prevalence of human rights and labour practice abuses. It is not hard to see the potential consequential risks on any investee business.
What is apparent, is the need to secure change to meet consumer needs. It was Steve Jobs who said, ‘innovation distinguishes between a leader and a follower’, and in these times, it holds true. Business transformation will enable agile companies to respond to these changing demands and global pressures. Many businesses have set a path on this route, with increasing numbers disclosing their ESG status and large corporates playing their part, particularly in the case of Ford announcing a commitment of $1bn from its $12bn endowment for mission or impact investing in the next decade. However, there remains a wealth of untapped potential within SMEs.
The recent pandemic and climate action events have shown us that people are desiring and increasingly campaigning for change to happen. To meet increased demand for sustainable businesses and products we can expect the investible universe to be influenced by an ever-improving base of socio-environmentally aware companies. These will disrupt traditional business models and widen the gap between the sustainability innovators and the traditionalists.
Managing disruption
It is partly this disruptive force that has led to the rise of impact investing and its ability to drive positive change in the marketplace. We can also draw similarities between impact investing and ‘Blue Ocean’ strategy; with leaders and innovators entering a largely uncrowded ‘blue ocean’ commercial space and capturing new demand from an increasing tide of sustainably-savvy consumers.
Impact investing itself has largely been around for about ten years, with the Global Impact Investing Network (GIIN) estimating the size of the global impact investing market to be $502bn (April 2019) managed by over 1,340 organisations. These figures compare favourably with the Global Sustainable Investment Alliance’s (GSIA) 2018 global estimate of $444 bn, which saw an impressive 79% growth (33.7% CAGR) on 2016 data.
Recent research by the GIIN has shown that annual returns of 5-15% are achievable, as are market competitive and market-beating returns. The GIIN impact investor survey (2019) showed that 91% of respondents reported portfolio performance that met or exceeded financial expectations, together with 98% confirming that socio-environmental expectations were also met or exceeded.
Impact investors possess the strategy needed to make real progress on global sustainability that consumers are passionate about and there is a reason why private equity firms, banks, funds, foundations, family offices and wealth managers have a vested interest in this area; it just makes good business sense.
One of the successes of recent times in the UK has included Big Society Capital, which has made over £1.7bn of new capital available to organisations with a social mission. Marrying the concepts of impact investing and social entrepreneurship has resulted in positive shared value outcomes.
As investors, governments and organisations begin to further define what this means for wider business and the community, implementation of the UN’s Sustainable Development Goals (SDGs) to tackle global sustainability challenges will likely play its part.
From RPS’s work with investors and investee companies we recognise that investors have a real opportunity to ensure that sustainable business transformation is well managed and adds value. Irrespective of where a company is in the cycle, there is always a case for improving value.
We have some way to go before a return to complete normality, whatever that normality finally is. One thing that is certain is the need for businesses to be agile, responsive to changing consumer needs and resilient to disruption. It is perhaps those driving forward sustainable innovation and transformation who will be best prepared to ride out the ripples in this Blue Ocean.
