Nawar Alsaadi, Kanata Advisors: For American Investors, Sustainability is a Risk, for Europeans an Opportunity

The application of sustainability principles (ESG) is not only an obligation that has recently been imposed on the economy but also an opportunity for profit, and this is where Europe differs from America. This is one of the highlights made by Nawar Alsaadi in an interview for Lider, one of the speakers at the Croatian Chamber of Commerce conference ‘Support Sustainability’ which will be held on September 9 and 10. Alsaadi is the founder and CEO of the ESG fintech advisory firm Kanata Advisors from Toronto. Before Kanata, he held senior ESG-related positions, such as Chief Impact Officer at Scope Four Capital, then Senior Portfolio Manager for ESG investment at Canada Post Pension Plan, and Director of ESG Insights at the ethical investment firm NEI Investments. In Zagreb, he will give a lecture on the topic ‘Sustainability 360° – from Obligation to Capital Expenditure’.

How can the application of sustainability principles improve financial performance and shareholder value?

– The integration of sustainability principles into business creates value through three levers: risk reduction, cost reduction, and generating new business. For example, a real estate company that improves the energy efficiency of its buildings will ultimately save money due to lower energy bills, thus reducing costs. At the same time, as regulations on energy efficiency for buildings tighten worldwide, it will reduce the risk of regulatory penalties or potential declines in the value of its properties. Another example is a European car manufacturer with internal combustion engines that is expanding its product offering to electric vehicles. Such an initiative is likely to stimulate new business by attracting new electric vehicle customers while ensuring the company’s compliance with stricter EU fuel economy regulations. As the company reduces costs, mitigates risk, and stimulates new business through sustainability initiatives, its financial performance and overall value will increase.

What specific sustainability initiatives have shown the highest return on investment (ROI) for companies?

– The answer to this question depends on the industry in which the company operates. The financial viability of sustainability initiatives must be assessed in the context of the company’s business, its cost of capital, and the costs of the sustainability initiative, among other factors. Taking this into account, an empirical analysis from 2023 conducted by CPP Investments, FCLTGlobal, and Wharton, including 2,900 companies in the MSCI World Index from 2010 to 2021, concluded that companies that effectively engage with their employees, for example by offering good working conditions and fair wages, typically have a higher return on invested capital; this result was consistent across all industries. Another example that spans investment industries is in energy or process efficiency. A comprehensive study of decarbonization projects from 2024 conducted by the universities of Göttingen and Bielefeld and Northwestern University found that 74 percent of decarbonization projects in North America over the last decade were related to improvements in energy or process efficiency, and 76 percent of those projects have a positive net present value (NPV). This appears to be a sign that investments in energy efficiency are capital-efficient. Despite these examples, sustainability calculations based on ROI must be conducted on an industry and individual basis.

How do companies balance initial capital expenditures for decarbonization with long-term financial benefits, and what is the role of investors in this process?

– This is an excellent question. Companies are under increasing pressure to focus on the short term and quarterly earnings. The average period in which public investors hold shares has shortened from eight years in the 1950s to less than six months today. This poses a significant challenge for companies looking to invest in sustainability, as most CEOs expect sustainability investments to pay off within three to five years. Academic research clearly shows that companies that manage for the long term create greater value. Therefore, regardless of whether investments are sustainability-focused or not, corporate boards need to ensure that CEOs do not manage for the short term but invest in the long-term future of their companies. To achieve this, it is necessary to establish a balance between short-term and long-term incentives for rewarding executives within a well-developed corporate strategy that encompasses short-term, medium-term, and long-term goals. Regarding sustainability, companies need to maintain a healthy dialogue with investors about the fundamental drivers of their sustainability investments, expected short-term and long-term returns, and resist the pressure to sacrifice the long term for short-term returns. Meanwhile, investors, especially asset owners such as pension and sovereign funds, should encourage their asset managers to manage for long-term returns and align the duration of their capital commitments with the needs of long-term decarbonization projects. In this context, private equity investors and infrastructure investors are better suited to invest in and finance sustainable transition projects than public market investors, who tend to hold investments for shorter periods.

What are the main challenges investors face when integrating ESG factors into their investment strategies? How do the approaches to integrating ESG into the investment process differ between North America and Europe? Find the answers to these questions in the new physical or digital edition of the business weekly Lider.