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Environment, Society & Governance – Value Rises, but the Language is Still Lacking

| Friday November 22nd, 2013 | 0 Comments

pe-charts-masterEarlier this week Jo Confino talked at the Sustainable Brands conference about the need to develop a new narrative for the sustainable space. “This is the biggest challenge for sustainability going forward…We come from CSR to sustainability, but sustainability as it is currently is not going to save the world. We need to move on to a completely new version,” he said.

While this is true for every part of the sustainable business world, it seems relevant in particular for the part that is constantly searching to make the business case for sustainability, including investors, shareholders and the C-suite.

The good news, as we learn from a new webcast from PwC on integration of ESG issues in deals and valuing their impact, is that a new narrative that investors and business can understand and relate to is actually emerging faster than we might think. The bad news though is that there are still plenty of obstacles ahead before this narrative can become a game changer.

Interestingly, it all starts with translating sustainability into ESG (Environmental, Society and Governance), a term that investors and companies seem to feel more comfortable with: “Sustainability is a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments.”

This definition, used by PwC (and originally created by Sustainable Asset Management) at the beginning of the webcast sets the tone for the whole discussion – this is not about vague goals like saving the planet or meeting the needs of future generations, but about a straightforward business approach that aims to create a long-term value. Could it be any clearer than this?

With this definition in hand it becomes easier to understand the argument that PwC makes in this webcast, which is that investors are increasingly taking ESG factors into consideration when assessing the value of a company, while most executives are still unsure how to truly unlock ESG value.

First, let’s look at the business’ side. According to PwC, companies around the world are spending increased time and resources on ESG. What do they do exactly? PwC points out three key stages: risk management, cost savings and value enhancement.

The first stage of risk management is where many companies start and it includes financial reporting, operational risk, regulatory compliance and environmental liability. The next stage is cost savings and it is mainly about eco-efficiency – environmental impact reduction, development of sustainability metrics, search for further cost savings and a shift towards integrated reporting. The most advanced stage, where you can find sustainable business leaders, is value enhancement – here companies work on developing strategic advantage through brand enhancement, product innovation and stakeholder engagement.

From the investors’ side, as identified by PwC in a survey it conducted among private equity investors, the most important driver to address ESG issues is risk management (36 percent worldwide). Yet, value creation is also an important factor. “Investors and private equity managers increasingly believe ESG management adds value,” explains Phil Case of PwC UK.

One indication for the growing importance of ESG in terms of both risk management and value creation can be found in mergers and acquisitions (M&A). This trend impacts both buy and sell side, PwC explains – as buyers consider ESG implications, sellers need a story to tell. The result is that we can see how ESG inputs become an integral part of the deal process, from identifying ESG risks and future regulations in the due diligence stage to identifying opportunities in terms of revenue growth or cost reduction in the exclusivity/completion stage.

“A company’s ESG strategy, or lack thereof, can have direct and indirect impacts on value, positive or negative. In the deal context, it can be important to identify and measure those ESG factors, whether risks or benefits, that have the most potential impact on value and ROI so that they can then be built into pricing decisions. Identifying risks or benefits that others miss can make the difference in winning an auction or earning the planned ROI for a deal,” said Donna Coallier, a partner in PwC’s Valuation practice.

Still, companies struggle to value the impact of ESG. While PwC provides a shareholder value framework that can be expanded to accommodate the difficult-to-quantify benefits of sustainability initiatives, it still seems that both investors and companies have difficult time putting a dollar value on ESG investments. This is especially true when it comes to soft benefits like workforce diversity or the value of being a good citizen.

From PwC data it’s becoming very clear that the importance of ESG will only increase in the upcoming years both to investors and companies. It looks like on the narrative side these two parties are on the same page. Now it’s time to work on developing a simple language they can share because unless we have a simple standardized framework to evaluate ESG value, we won’t see ESG becoming as material as it should be for a long time.

[Image credit: PwC]

Raz Godelnik is the co-founder of Eco-Libris and an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and Parsons The New School for Design, teaching courses in green business, sustainable design and new product development. You can follow Raz on Twitter.


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