Sustainability issues have risen up the business agenda and they can no longer be ignored – consumers and investors alike are demanding more responsibility from the companies they buy from and whose shares they own.
Investment that takes into account environmental, social and governance (ESG) issues now represents one in every four dollars invested in the US and has risen to nearly $23 trillion globally. This growth is little surprise given that the World Economic has Forum included among its top global economic risks for 2019: extreme weather, biodiversity loss, failure to mitigate climate change and the water crisis.
Academics, bankers and investors – from Oxford University and Harvard Business School to Morgan Stanley and Bank of America Merrill Lynch – have highlighted the fact that focusing on a sustainable business strategy can provide a competitive advantage in stock price, cost of capital and operational performance.
But even if companies are increasingly aware of the need to address these issues, they don’t necessarily know how to talk to investors about them. “When it comes to engaging investors on sustainability, the vast majority of companies are still missing the mark,” says Mindy Lubber, CEO of sustainable investment group Ceres. “With rare exception, they fail to present sustainability as an integral component of business strategy and decision-making, or as a driver of increased business resilience and revenue growth.”
The group has put forward nine recommendations “to guide companies toward more meaningful and effective investor engagement on ESG issues, helping them to not only meet investor expectations, but also capture competitive advantage”.
The recommendations are the culmination of 30 years of talking to companies and investors about how to integrate ESG considerations into business strategies. “We understand that for many companies, engagement with investors on ESG issues is fraught with trepidation and resistance. This leads to reactive, less effective interactions with interested investors,” Ceres says in a new report, Change the Conversation: Redefining How Companies Engage Investors on Sustainability.
This is likely to continue until companies know what ESG information investors value, how they want to see this information presented and who they want to hear from, said report author Kristen Lang. companies will continue to fall short in providing the decision-useful information investors need to fully understand and value the financial implications of critical sustainability risks and opportunities.
Ceres talked to ESG-oriented asset managers, ESG and governance analysts, and proxy advisors to find out what investors want.
The recommendations are grouped into three themes, to guide companies toward more meaningful and effective investor engagement on ESG issues and explain how companies that take these steps can be better positioned to meet investor expectations and capture competitive advantages.
Strategy #1: Formalize sustainable business integration
- Demonstrate accountability for sustainability.
- Develop the business case for sustainability.
- Cultivate collaboration between sustainability, investor relations and governance teams.
These recommendations respond to increasing investor expectations for companies to demonstrate accountability for ESG, a desire to understand the business case for sustainability and the importance of internal alignment and buy-in, Ceres says.
Strategy #2: Identify what to disclose and where to disclose it
- Focus investor-directed disclosures on what is material, but don’t ignore emerging trends.
- Disclose decision-useful information, both quantitatively and qualitatively.
- Disclose sustainability information consistently where investors are already looking.
Investors want more robust and comparable disclosure that gives them the information they need to make better investment decisions.
Strategy #3: Implement a proactive investor engagement strategy
- Use language that investors understand and value.
- Leverage the C-suite and board of directors as key messengers.
- Diversify investor engagement strategies
Larry Fink, CEO of Blackrock, in his annual letter to company CEOs, outlines the case for companies having a purpose, saying: “Profits are in no way inconsistent with purpose—in fact, profits and purpose are inextricably linked. Purpose unifies management, employees, and communities. It drives ethical behavior and creates an essential check on actions that go against the best interests of stakeholders. Purpose guides culture, provides a framework for consistent decision-making, and, ultimately, helps sustain long-term financial returns for the shareholders of your company.”
A wide range of studies show that a sustainable business strategy can provide a competitive advantage in stock price, cost of capital and operational performance.
That is why investors are becoming increasingly vocal about ESG issues, such as the shareholder resolutions they have filed with the oil and gas companies calling on them to explain how their business strategies are compatible with the targets of the Paris climate agreement.