A new report released by the sustainability nonprofit organization Ceres provides a deeper look into investors’ evolving expectations on how companies should communicate and tackle the challenges and opportunities presented by the world’s greatest sustainability challenges, including climate change, water scarcity and human rights risks.
Change the Conversation: Redefining how Companies Engage Investors on Sustainability, provides insight on what investors want to know, how they want to see it and who they want to hear from, so that companies can provide the information that investors need to fully understand and value the financial implications of critical sustainability risks and opportunities. The report aims to create an environment where companies are rewarded by investors for implementing sustainable business strategies.
“We know from our own research that most companies with sustainable business strategies continue to share information that reinforces the misconception that environmental, social and governance (ESG) issues are extra-financial and not material. They fail to communicate sustainability as an integral part of their decision-making that drives business value,” said Kristen Lang, a Ceres Company Network director and author of Change the Conversation. “We must change the conversation that companies have with their investors on sustainability so that 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.”
To ensure companies’ better communicate and understand exactly what investors want and expect on sustainability, the report draws on interviews with investors in the Ceres Investor Network on Climate Risk and Sustainability to answer some of the most commonly asked questions from companies on ESG integration and disclosure including:
- How do investors define sustainable business leadership?
- What timeframes are investors interested in: short or long-term?
- What does meaningful ESG disclosure look like to the investor community, and where and how do they want to see it?
- In an increasingly crowded space of companies claiming to be sustainable, how can companies stand out and be rewarded by investors for their leadership?
Climate change, natural resource scarcity, human rights abuses and other sustainability risks increasingly threaten to undermine business operations and disrupt global supply chains. But, research shows that when companies move to integrate and disclose ESG issues into their core business strategies, they end up outperforming their competitors. As a result, the investment market continues to see growth in ESG investing, representing one quarter of all professionally managed assets around the world. As ESG investment climbs and the business case for corporate sustainability strengthens, investor interest is also mounting in response to the urgent calls from the scientific community for transformational economic change to avoid the worst human and environmental impacts of climate change.
“Value creation is expressed in financial terms, but the drivers of sustainable competitive advantage are beyond purely financial indicators,” said David Blood, Founding Partner, Generation Investment Management. “We want to know how you are proactively positioning and monitoring the long-term drivers of your business.”
And yet, when it comes to engaging investors, companies fail to present sustainability as an integral component of business strategy and decision-making. Change the Conversationlays out nine recommendations for companies to improve investor engagement on ESG issues, helping them to not only meet investor expectations, but also capture competitive advantage.
- Demonstrate accountability for sustainability
- Develop the sustainability business case
- Cultivate collaboration between sustainability, investor relations and governance teams
- 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
- Use language that investors understand and value
- Leverage the C-suite and board of directors as key messengers
- Diversify investor engagement strategies
The recommendations underscore a critical theme that emerged from the investor interviews: meaningful, effective, and consistent communication with investors requires that companies not only talk the talk, but demonstrate how they are walking the walk.
“We need to see corporate sustainability managers operating as business partners and leaders,” said Candace Hewitt, Responsible Investing Senior Analyst at Nuveen, a TIAA Company. “We also need to hear from CFOs regarding how they perceive value creation around sustainability and what that means for systemic business results.”
As companies move to implement the recommendations laid out in Change the Conversation, they will be looking for investors to clearly demonstrate how increased ESG integration and disclosure is rewarded in investment decision-making. They also will want investors to demonstrate their own understanding that ESG issues are material financial issues through the questions they ask and the expectation they set for companies across their portfolios to communicate this link.
“The companies that we think should win over time are the ones that understand the balanced approach to everything at once,” said Global Industry Analyst, Evan Hornbuckle, from Wellington Management Company. “And that profitability and sustainability aren’t mutually exclusive over time.”