As it becomes clear that the world cannot sustain humanity's current form of wasteful existence in the long term, efforts are being made to transform business and society towards a more sustainable future. In recent years, more investors are becoming keen on their investments performing well on sustainability metrics, because of both improved business performance and in relation to longer term goals. Companies remain slow to react however, with many lacking a sustainability strategy or a business case in which a good sustainability performance stands out.
Sustainability has become a more topical issue in recent years within the business community. The very real risks from a range of factors – from climate change to water shortages and fallout from unethical supply chains – are now influencing a range of stakeholders to seek ways of reducing their individual footprint. While investors are hot on sustainable investments, many companies are slow to react to changing investor expectations and the business advantages of a sustainable model.
In a new report from MIT Sloan Management Review, in collaboration with The Boston Consulting Group (BCG), the current relationship between investors and companies is considered, focusing on the issue of sustainability. The study, titled ‘Investing for a Sustainable Future’, involves 3,000 executives and managers from more than 100 countries, of which 19% are from investment firms (mainly strategic and institutional), 24% work at publicly traded companies and 57% at private companies.
The study highlights that investors and companies are becoming more concerned about good sustainability performances. When asked to what degree good sustainability performance matters more to investors than it did three years earlier, 43% of investors agree to a great extent that it does, while 31% said that it does to a moderate extent. When considering private company response, it is clear that they have some inkling to increased importance of good sustainability performance to investors, at 44% stating it is important to a great extent and 30% to a moderate extent. Publicly traded companies are less onto the change in perception among investors, with 33% agreeing that sentiment has changed to a great extent and 32% to a moderate extent.
While sustainability is cited as something important to investors, companies are struggling to turn investor expectations into concreate strategies. While 90% of companies surveyed say sustainability is important, only 60% had a sustainability strategy in 2015. The number of companies with a sustainability strategy has, in contrast to the increased expectations of investors, fallen over the past three years – from 62% and 68% in 2013 and 2014 respectively. One of the key issues cited by many respondents is that they lack a positive business case for sustainability, with only 25% able to develop one for their respective industry setting.
The lack of an explicit business case at company level may become a less important factor as a range of studies, which are referenced by investors as basis for making investment decisions, find that companies with strong environmental, social and governance (ESG) performance have a higher correlation with strong valuations, expected growth, and lower costs of capital. One study also found that high ESG performance correlates strongly with lower credit default swap spreads.
When asked why a company’s good sustainability performance is important to their investment making decision, a wide range of factors were indicated. The most positively viewed factor, when combining very and quite important outcomes, is that ESG performance is linked to a company’s increased potential for long-term value creation (82%). Companies with strong sustainability performances are also viewed as having improved revenue potential (75%), better operational efficiency (74%), and improved compliance with market expectations (72%).
"2016 is set to be the year of green finance," says Achim Steiner, executive director of the United Nations Environment Programme. "Across the world, we are seeing a growing number of countries aligning their financial systems with the sustainability imperative."
A sustainable future
Investors are also becoming shrewder about their willingness to invest in companies that have poor sustainability performances. Particularly board members at investment firms are keen to exclude or divest away from poorly performing companies in the sustainability category, at 57%. C-suite executives are still keener to cut and run more often than not, regarding their investment in companies performing poorly in sustainability.
Investors are often in the dark about the state of sustainability performance of companies in their portfolios from the companies themselves – often having to leverage external sources from which to make their decisions. A 2015 survey, conducted by MIT Sloan Management Review and the National Investor Relations Institute (NIRI), found that only 24% of surveyed IR professionals are asked by their organisations to tell investors about the value of sustainability to the company’s bottom line — about the same percent of companies that have a business case for sustainability in the MIT SMR-BCG survey. Nearly 40% aren’t given direction on sustainability reporting at all. Nearly 80% don’t regularly include sustainability talking points in investor presentations, and almost half of respondents from IR departments don’t believe that a sustainability strategy is necessary to remain competitive in their industry. Improved focus on sustainability, the development of sustainability strategies that meet investors’ expectations as well as long-term growth goals, and clear communications may be key to the range of benefits sustainable companies have been found to possess.
“Unfortunately, too few companies are prepared to benefit from more-sustainability-savvy investors. This year’s research showed that while 90% of executives see sustainability as important, only 60% of companies have a sustainability strategy in place, and just 25% have generated a clear business case,” says Knut Haanæs, a BCG Senior Partner and founding leader of the firm’s Sustainability practice. “And a clear business case is at the core of a company’s sustainability story for investors.”