Sustainability business case 3.0 – the investor perspective
July 06, 2016
A range of opportunities exist for sustainable companies to demonstrate the long-term value they are creating to investors, writes George Blacksell.
You’ve quantified benefits of individual programs, made the case to the board – the next step for corporate sustainability professionals is to effectively communicate a value creation strategy to investors. This is what we call the ‘third wave’ of demonstrating the business case of long-term economic, environmental and social sustainability.
Mainstream investment firms and banks are responding to increased demand for sustainable investment products, i.e. those that incorporate Environmental, Social and Governance (ESG) factors into their analysis. Recent examples include Deutsche Bank’s announcement that it intends to raise €1bn from socially responsible products in collaboration with the ethical investment firm Arabesque Asset Management. According to the Global Sustainable Investment Review, the value of assets invested with a sustainable mandate grew by 61% to $21.4tn between 2012 and 2014.
In order to attract investors from the burgeoning responsible investment community, firms need to be able to effectively communicate their ESG credentials alongside their financial performance – but in a way that is relatable to this new and growing audience.
Firstly, identifying the most material issues is essential to having a meaningful dialogue with investors. The way corporates have tailored their reporting to different audiences has evolved as new tools became available. Microsites, such as BAM Construction’s, enable stakeholders to easily access key topics of interest. Materiality matrices, and the accompanying exercise, have been a useful way of focusing reporting efforts on the most important aspects. Initiatives such as the Sustainability Accounting Standards Board and GRI have also afforded materiality a new level of rigour. Corporates are increasingly quantifying and communicating their material impacts (environmental, social and/or economic). All of which can help investors looking to build portfolios based on high quality ESG information.
Secondly, addressing the wider context is essential if a company is to demonstrate its long-term viability. Moody’s has already threatened to downgrade industries and companies that fail to deal with climate policies and decarbonisation trends following the COP21 agreement. UK companies should take note that the government just last week announced its 5th carbon budget, which set emission reduction levels at 57% on 1990 levels. Setting science-based emissions targets is one way for a company to signal that it is addressing carbon commitments consistent with a below 2oC scenario – and 168 have already committed to doing so.
Thirdly, corporates can continue to build on a wealth of information over successive years through reporting on a strong set of non-financial KPIs. This can enable investment analysts to look at trend data and assess performance on whether a company can deliver on its stated objectives. Having a set of metrics behind an overarching “purpose” can help increase accountability on whether a company is on track to meet its aims. Transparency in the event of fluctuations in performance shows that the targets set are challenging and a genuine attempt at leadership.
Finally, through quantifying the business and financial benefits of a sustainability strategy companies can prove that the successful management of these initiatives is delivering tangible results. Examples include M&S reporting on the cost savings and higher revenues it has reaped from “Plan A”, over £625m to date, as well as Unilever attributing the lion’s share of growth to those brands which have integrated the wider sustainable living purpose into their offering.
In addition to increasing demand from ESG-focused investors, perceptions are changing in the wider investment industry with regard to sustainable investing practices. New studies have consistently shown that taking ESG factors into account can deliver competitive returns. As portfolio managers look to integrate these factors, sustainability professionals can use the above four methods (materiality, wider context, non-financial KPIs and quantified business benefits) to ensure they attract investor’s attention.
Over the next couple of months Corporate Citizenship is looking to convene a conversation we have called the “long term value project”. We will be studying examples of corporates communicating their long-term value creation strategies (or ESG credentials) in a way that investors can relate to. In doing so, we are looking to answer questions such as: “what are the barriers to effective dialogue?” and “how can we overcome them?”
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