Capital markets are clamoring for more information about climate change and other environmental, social and governance (ESG) risks, as the recent World Economic Forum in Davos made clear. Investors are screening for ESG risks as never before, as TriplePundit has reported, with investments guided by ESG criteria rising to $12 trillion in the US alone.
When it comes to engaging investors on sustainability, the vast majority of companies are still missing the mark, according to the report. With rare exceptions, 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.
In “Change the Conversation: Redefining how Companies Engage Investors on Sustainability,” Ceres drew on interviews with more than 25 Ceres investor partners to develop key recommendations to help companies communicate sustainability as an integral component of decision making and a driver of business value.
“When companies sit at the table with investors or present at their AGM [annual general meeting], and sustainability comes up, they are reinforcing the misconception that sustainability is extra-financial and not material, when in fact sustainability improves the resilience of the company and the bottom line,” Kristen Lang, a Ceres Company Network Director and author of the report, told TriplePundit.
“By changing the conversation, it will create an environment where companies can be rewarded for their commitments and incentivized to continue to scale their ambition and urgently respond to issues like climate change, water scarcity and human rights abuses,” Lang said.
The report noted 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.”
Lang said that without deeper insight on what ESG information investors value, how investors want to see this information and who they want to hear from, 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. “
“For most companies,”, she explained, “their first point of contact on ESG issues, or perhaps their only point, is third-party research providers. There is a big reliance on these providers, which means that the information is isolated to the ESG teams in house who can answer the questions. There is not a lot of collaboration between sustainability teams and investor relations [IR] teams. So if IR teams or the C-suite is not getting the questions directly, there can be apprehension or confusion around what investors really want.”
The recommendations Ceres sets out to tackle this problem are contained within three strategies: 1) Integrate sustainability into business systems and decision-making, 2) Identify what to disclose and where to disclose it, and 3) Implement a proactive investor engagement strategy.
These three elements are dependent on one another, Lang argues. Without internal buy-in at the highest levels for sustainability and a strong sense of how to communicate this internally, companies will not succeed in communicating their commitment externally, especially in language investors understand and value.
“If there is not a common understanding of these priorities it will be harder for companies to get the message out there,” Lang told TriplePundit.
Disclosure of sustainability activities and risks most often occurs in sustainability reports. Investors interviewed by Ceres said they use these sources because that is where they expect to get the most complete information, not because that is necessarily where they want to see it.
They’d rather see ESG information in proxy statements, 10-Ks and annual reports: information that all investors reference.
The biggest missed opportunity identified by investors and analysts, according to the report, is the failure of companies to showcase customized, streamlined sustainability disclosures in the IR pages of their websites.
“If they can’t find it, they can’t use it,” Lang said. “Companies are making it hard for investors to get the information they need.”
The third strategy, proactive engagement with investors, is among the most important, Lang argued. “This needs to happen more explicitly, to shift from a reactive approach when a crisis occurs to really articulate their sustainability strategy and how those actions mitigate risk, improve resilience, and drive business growth and revenue.”
According to Lang, investors are pushing for more clarity from companies on ESG information because they recognize that sustainability is core to business value creation.
Studies from wide-ranging sources, including Oxford University, Harvard Business School, Morgan Stanley and Bank of America Merrill Lynch, the Ceres report noted, all affirm that a focus on a sustainable business strategy can provide a competitive advantage in stock price, cost of capital and operational performance.
“What came up often in our interviews with investors was the level of missed opportunities that they were seeing,” Lang told TriplePundit. “I think the recommendations will provide companies with the guidance they need to meet investors’ expectations. I hope they use this report as a conversation starter.”
The report includes several case studies of companies who are engaging investors successfully. At its 2017 Investor Day, for example, Nike informed shareholders of the company’s expectations that 50 percent of its growth in the next five years would be driven by innovation. And in a 2018 video on its IR website, Nike’s CFO Andy Campion explains how sustainable innovation is a core part of that strategy. The company’s FlyKnit technology, Campion noted in the video, has generated over $1 billion, and is quickly approaching $2 billion in revenue growth for the company.
The technology precisely engineers every stitch of a shoe upper to deliver maximum performance for athletes and produces 60% less waste than traditional cut-and-sew methods. Since 2012, the technology has reduced nearly 3.5 million pounds of waste.
That, said Lang, is the kind of information, especially coming from a CFO, that will make investors sit up and take notice.
Image credit: Nike/Facebook
Based in southwest Florida, Amy has written about sustainability and the Triple Bottom Line for over 20 years, specializing in sustainability reporting, policy papers and research reports for multinational clients in pharmaceuticals, consumer goods, ICT, tourism and other sectors. She also writes for Ethical Corporation and is a contributor to Creating a Culture of Integrity: Business Ethics for the 21st Century. Connect with Amy on LinkedIn.