Although a lot has been written about the positive impact of sustainable practices on the environment, the material impact of such practices on companies’ balance sheets and P&Ls has remained overshadowed.
The question therefore is, can sustainable practices have a positive material impact on companies’ financial performance? Although there are undoubtedly many various ways how the impact can be measured, we are examining the impact of Greemium, i.e. Green Premium from the perspective of “Green Bonds” issuance and “Green Marketing.”
Green Bonds are financial instruments adhering to Green Bond Principles as well as to ESG standards. Green Bonds have started to be issued around 2010’s and received a standardisation boost in 2014 with the introduction of the Green Bond Principles. As such, Green Bonds are the most issued in EU and the United States. In terms of currencies, 79% of Green Bonds are issued in either EUR or USD thus underlying the interest in ESG-related financial instruments in these 2 geographies.
Although aiming at sustainable-related practices, Green Bonds face many challenges in terms of unlocking the Greemium.
Firstly, there is a generic lack of regulatory requirements pushing bond-issuing companies to adhere with their green commitments, thus increasing the risk of “Greenwashing.”
Greenwashing is the process of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound. Source: Investopedia
Secondly, there is no certainty, that Green Bonds-financed projects will adhere to Sustainable Development Goals (SDGs) or the Paris Agreement. This makes it challenging to fully associate such projects with their impact on carbon emission reductions (Ehlers, Benoit et. all, 2020).
Thirdly, there has not been a study proving a positive impact of sustainable-oriented projects on the company performance. This was proved by Saloni R. Wadhwa in the 2020 study “Are Green Bonds Just Another Financial F een Bonds Just Another Financial Fad or Ar ad or Are They Here to Stay?”.
The time series analysis showed us that the investor yield greemium went from mostly negative between 2010 and 2014, to a substantial yield premium in 2015. As of 2016, there was only a single matched sample, which does not allow us to conclusively determine if the green bond is at par with the conventional bond presently. (Saloni R. Wadhwa, 2020)
As a consequence, Green Bonds and generally financial markets tend to incline towards rational behaviour and as such the investor Greemium on Green Bonds is essentially zero. Investors view green and non-green securities by the same issuer as almost exact substitutes. Thus, the Greemium is essentially zero (Larcker and Watts, 2019)
The second branch of the potential area of Greemium creation lies with the Green Marketing practices. There is nothing wrong with a company proudly presenting its Green contributions if based on true. In other words avoiding Greenwashing.
Examples of such market practices include IKEA promoting green consumerism, BrewDog making its stance on CO2 abundantly clear, and Persil’s “Dirt is Good” campaign hoping to raise awareness of small acts to combat pollution.
Consumers will justify the extra cost to be eco-friendly. (Tom Morris, GWI-Green consumerism: what you need to know, 2021)
As a result of these campaigns, consumers are willing to readjust their value tree 🌳 where usually price and availability play the most important role. In this regard, if a product is branded as eco-friendly 60% of internet users say they’ll pay more for products that are eco-friendly (Tom Morris, GWI-Green consumerism: what you need to know, 2021).
Overall, knowing a company is environmentally-oriented has consistently ranked among internet users’ top 10 purchase drivers since GWI began tracking it in 2019, with 1 in 5 saying this as of Q1 2021.
In conclusion, although there has not yet been any proven positive material correlation between sustainable projects and the impact of company’s balance sheet, the fact that customers are willing to pay a Greemium for a company’s products and services sets a positive trend into the future. This means that companies that are truly able to deliver sustainable value may not only contribute to improving our climate and social conditions but also may perform better in comparison to its peers.