Why Investors Do Not Seem to Get Sustainability

Engaging with investors around your most material topics
Why Investors Do Not Seem to Get Sustainability
Publ. date 16 Mar 2015
The recent CEO study by UN Global Compact and Accenture reported that, while 38 percent of CEOs believe they are able to accurately quantify the business value of their sustainability initiatives, just 7 percent of investors agree*. This striking gap demonstrates the shortcomings of many companies in effectively communicating ánd quantifiably measuring the business value and success of sustainability.

The growing importance however in initiatives such as the UN-supported Principles for Responsible Investment (PRI) and the Dow Jones Sustainability Index (DJSI) shows the increasing interest of investors. But how to engage with investors (and the right kind of longer-term oriented investors) that are focused on the financial, long-term impacts of sustainability initiatives?

Why we fail in engaging investors today

Today, in most cases companies still fail to report on the financial impact of their sustainability activities, which makes it difficult for investors to estimate the impact that sustainability has on the financial projections. Looking at the Dow Jones Sustainability Index (DJSI) as one of the most credible ratings of corporate sustainability investment**, its corporate sustainability assessment explicitly requests to quantify monetary gains from sustainability, and to expose the business case behind sustainability.

The world's largest asset manager BlackRock*** fully agrees when it comes to laying out the business case for a long-term sustainable strategy. With more than $4.3 trillion in assets under management, the world's biggest investor strongly states that managing risks forms a crucial part of a company's sustainability blueprint.

BlackRock's managing director and global COO Corporate Governance & Responsible Investment Team, Chad Spitler says: “When we are looking at companies, one of the things we are concerned with is: are they taking a short-term risk that may bump earnings up in the near term, but at the expense of the long-term viability of the company?". Spitler added: "What we don't want to see are sustainability reports that are seperate or unrelated to business growth or risk. What we really want to see is how sustainability principles are related to risk and opportunity for each business and how the company is managing that." 

What it's all about for investors: the concept of financial materiality, long-term risks and opportunities 

When addressing investors and sustainability, we speak about 'financial materiality'. Building on the materiality matrix, describing the key sustainability topics for a company and its key stakeholders, 'financial materiality' refers to those sustainability topics and issues that are most relevant to the company's financial performance. More specifically, it can be seen as a further prioritization of the key sustainability topics according to the likelihood and the expected magnitude of their impact on business drivers such as growth, profitability, capital efficiency and risk. Once the financial materiality has been defined, RobecoSAM, then looks at how company management is addressing the most financially material topics. 

When analyzing a company stock, RobecoSAM's Dow Jones Corporate Sustainability Assessment looks at the following key drivers:

  • Revenues: proceeds from sales, which depend on the company's product mix, sales volume and pricing. Relevant sustainability criteria: Innovation Management, Product Stewardship, Human Capital Development 
  • Costs: the company's cost structure, which determines its profitability. Relevant sustainability criteria: Supply Chain Management, Environmental Management, Occupational Health & Safety
  • Risk/Cost of Capital: the company's capital structure and exposure to risks, which determine the discount rate used to adjust projected future cash flows. Relevant sustainability criteria: Environmental Management, Corporate Governance, Risk Management, Occupational Health & Safety 

 

 

 

 

 

 

Source: RobecoSAM, The Sustainability Yearbook 2015, Page 19 

Next to financial materiality, investors use sustainability information to identify risks and long-term business opportunities. For example, if innovation and environmental management are essential topics for a chemical company, enclosing in reporting specific revenue targets of 45% of total revenues from ecological products, for which the company derives higher margins, are an example of how companies can help investors calculate specific financial sustainability impact. 

Key takeaways to getting the right kind of investors in

Moving forward, it is important that CEOs and CFOs start demonstrating how their sustainable activities contribute to creating competitive advantage..A first step can be made by working closer with investors through bodies such as the UN PRI principles, Ceres' Global Initiative for Sustainability Ratings (GISR), RobecoSAM's DJSI or IRIS, an initiative of generally-accepted performance metrics that leading impact investors use to measure social, environmental and financial performance of their investment, developed by the Global Impact Investing Network. This way, companies can better define common metrics that put sustainability in business terms in order to quantify the real business value. Second, focusing reporting on financial materiality is essential. Demonstrate for example how shifting to a circular economy business model is an answer to uncontrollably increasing resource prices, and how it could improve competitiveness. Finally, sustainability should not be a standalone activity, but embedded into the company's core strategy. By expressing clear targets, it will help the investor calculate the impact on the financial bottom line. 

More information

Are you looking for opportunities to engage your investors in sustainability? Please contact Josée van der Hoek at josee@finchandbeak.com to find out how we can help you. Since 1997, Finch & Beak has assisted various companies across Europe with the development of valuable business cases for sustainability, and the integration of sustainability into the business. Furthermore, we closely collaborate with RobecoSAM to provide companies with guidance for the DJSI assessment. 

* Stanford Social Innovation Review, Supercharging Corporate Sustainability by Georg Kell & Peter Lacy, 2015 
** Project Rate the Raters, 2013 
*** GreenBiz, Blackrock, Unilever, PVH on sustainability from investors to boards of directors by Helle Bank Jorgensen, 2015 

About Josée van der Hoek

Experienced strategic issues management specialist with expertise in strategy development, food waste and DJSI. | josee@finchandbeak.com

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