Commercial, Industrial, Sourcing Renewables  -  February 25, 2019 - By Mindy Lubber, Ceres

Can We Talk? Changing the Sustainability Conversation Between Investors and Companies

 As investors increasingly come to grips with the challenging realities, risks, and opportunities of a changing climate, resource depletion, and human rights, we need to change the ways companies talk with them about these issues.

While it’s true that environmental, social and governance (ESG) concerns are finally being woven into the strategies of many leading companies across the globe, the ways they engage investors on these concerns too often miss the mark.

Academic and investment research continues to demonstrate that serious, strategic attention to ESG issues delivers higher stock returns, incurs lower capital costs and lowers volatility risks. But too many companies fail to present sustainability as a core component of business strategy, decision making, and revenue growth. Many continue to portray sustainability issues as extra-financial (i.e., merely “the right thing to do” or “good public relations”) when evidence is growing that they are in fact material to strong financial performance.

These failures to communicate have real costs. When companies don’t engage effectively with investors on their sustainability efforts they miss opportunities to differentiate themselves from peers. Rather than gaining a competitive advantage, they leave the financial value of sustainability out of critical conversations.

A new Ceres report, Change the Conversation, will help companies understand what investors want to know and capitalize on the opportunities to credibly present sustainability as a driver of business value. The report provides specific, investor-informed recommendations on how companies can better communicate the breadth, scope and financial value of sustainable business strategies. It also calls for deeper involvement of C-suite executives and board members as messengers of sustainable business priorities.

The report’s findings are based on decades of Ceres’ work with investors and companies, and in-depth interviews with Ceres Investor Network members. These interviews include some of the world’s largest asset owners and asset managers, as well as ESG-oriented asset managers, governance experts, and proxy advisors.

While laying out the case for better engagement with investors on these issues, Change the Conversation makes clear that sustainability is, in fact, a material economic risk and opportunity and not a passing fad. The report highlights the following trends:

• In just the past few years, ESG-oriented investments have nearly doubled to $12 trillion in the U.S. alone, and $23 trillion globally, and more growth is expected.
• Some companies are already responding to rising investor interest. Recent Ceres research shows that nearly 400 of the largest publicly traded companies in the U.S. have commitments to reduce greenhouse gas emissions, more than 300 actively manage water resources and nearly 300 actively protect employees’ human rights.
• Studies by Harvard Business School, Morgan Stanley and Bank of America, among many others, affirm that robust sustainable business strategies provide competitive advantages in stock prices, capital costs, and operational performance.

ESG investing is going mainstream because, quite simply, it’s just good business. As Evan Hornbuckle, a global industry analyst at Wellington Management, shared with Ceres, “The companies that we think should win over time are the ones that understand that profitability and sustainability aren’t mutually exclusive.” In January, this viewpoint was echoed by Larry Fink, CEO of BlackRock, in his letter to corporate CEOs: “Profits are in no way inconsistent with purpose—in fact, profits and purpose are inextricably linked.”

So, how should companies talk to investors about their sustainability risks and opportunities? Change the Conversation organizes its recommendations under three guiding strategies. In broad strokes, companies need to:

1. Formalize sustainable business integration
2. Identify what to disclose and where to disclose it
3. Implement a proactive investor engagement strategy

The three strategies underscore a critical theme that emerged from our investor interviews: credible and meaningful communication of ESG information with investors requires that companies not only talk the talk but are prepared to demonstrate how they walk the walk.

Adopting these strategies may take a bit of culture change in some companies. As the report says, “For many companies, engagement with investors on ESG issues can be met with apprehension, skepticism, and confusion [leading] to reactive, less effective interactions with interested investors.” In still too many instances, companies communicate their efforts only in CSR reports that many investors are unlikely to read, and fail to quantify the business value of their sustainability initiatives at all. (Change the Conversation cites an Accenture CEO Survey showing that more than 40 percent of CEOs could not accurately quantify the business value of their sustainability initiatives.)

Companies also need to recognize that changing the conversation starts at the top. Board members, C-suite executives, and corporate secretaries all need to be competent and credible messengers on the business value of sustainability. As one of the investors Ceres interviewed put it, “If the CEO says it’s important, it carries more weight. Wall Street cares about what the person in charge has to say, otherwise how important can this be if the CEO isn’t willing to take the time to speak about it?”

Ceres envisions a future where ESG and sustainability issues aren’t in a separate work stream but are an integral component of business planning and execution that investors routinely assess and reward. By elevating sustainability as a key driver of business value, companies must and can change the conversation with investors.

This column was originally posted on the Ceres blog. Click here for more information or to download the full report.

Mindy S. Lubber is the CEO and President and an early board member of Ceres, a sustainability nonprofit organization working with the most influential investors and companies to build leadership and drive solutions throughout the economy.  Under her leadership, Ceres has launched visionary and practical guides, including The Ceres Blueprint for Sustainable Investing and The Ceres Roadmap for Sustainability, for investors and companies to succeed in the 21st century global economy. 

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