For all intents and purposes, Sustainability has matured as a field to the point of effectively becoming part of the mainstream lexicon for both investors and companies alike.
Evidence that Sustainability is now reflected in mainstream business practices can be found from many directions. I chose three to explore for the purposes of this blog:
- Top-down emphasis across professional trade associations and counsels
- Sector-specific company communications and competitive positioning
- Related growth, valuation and investment research commentary
A simple word search on sustainability across multiple professional organizations’ websites, results in dozens of current articles, events and other attention to Sustainability. I looked at the following organizations geared toward professional investors and corporates, respectively:
- CFA Institute, Private Equity Growth Counsel a.k.a. American Investment Council and Center for Audit Quality (CAQ)
- Manufacturers’ Alliance for Productivity and Innovation (MAPI), Electric Power Research Institute (EPRI), Association for Supply Chain Management a.k.a. Association for Operations Management (APICS) and Council of Supply Chain Management Professionals
All had a significant number of search results.
With regard to sector-specific communications and competitive positioning, I have previously dedicated separate blog posts to the IT, lodging & leisure and utilities sectors, and also to the supply chain field, in which I elaborated on the usage of ESG (Environmental & Energy, Social Responsibility and Governance) / sustainability in competitive business practice. For this blog post, I’ll focus on growth, valuation and investment research.
The broader ESG / sustainability field is replete with information that is often too subjective for capital asset managers to use in investment research and decision-making. However, mainstream attention is focusing on where ESG factors prove to be material to a company’s revenue growth, margins, required capital and risk. To this end:
- ESG factors on average now account for 7% of a company’s valuation, according to a recent study that examined several hundred investment cases for ESG impact on sales growth, margins, weighted average cost of capital (WACC) and target price
- In the same study, innovation management, corporate governance, supply chain and human capital management were found to be the most material factors
- The study researchers also found that analysts identified mechanisms by which sustainability impacted profitability, i.e.:
– Good human capital management that lead to lower turnover
– Excellent operational management and energy efficiency
– Good sales growth and supply chain management
- “Mainstream investors are becoming more sophisticated in the way they integrate environmental, social and governance (ESG) information in their investment process.” – Cecile Biccari, Managing Partner, Contrast Capital
Terminology usage can be tricky. C-suite and investor relations executives may not always realize when investors’ inquiries are being driven by their ESG / sustainability-purposed analysis. To run a test, I decided to run a search across all broker research reports in AlphaSense for references to human capital management by sell-side analysts, as a broader proxy for investor interest in the same.
Admittedly, I was surprised by the fairly large number of results – much more than I expected to find in sell-side analyst research reports. It is fascinating to see which terminology variant commentary (Smart SynonymsTM) was also found related, in context, to the word sustainability, and also to contemplate whether or not the actual word sustainability entered into any conversations or research that was conducted in the process of writing the research notes.
What motivated the analysts to write about human capital management in research reports that they sell to the institutional investment community? Within the results, I found such analyst observations as:
- “At the core of the [company x] sustainability strategy is a commitment to its employees.”
- “Talent attraction and retention is ranked as a top tier material issue in the sustainability matrix, and also appears among the company’s principal global risks.”
Recognizing when investors are actually driving a conversation about ESG / sustainability with corporates is not always easy. I encourage my clients to recognize that much of what we now call sustainability is really old management concepts with new terminology, and particularly so, when used in mainstream context.
Even though terminology can cloud things a bit, there is a steady stream of information these days that confirms Sustainability application is in reciprocal mainstream practice to both investors’ and companies’ benefit. For instance, in two recent weekly sustainability briefs, we learned that:
- Sustainable investing is one of the “fastest growing asset classes” at UBS, rising to more than $1 trillion, or about a third of the bank’s assets under management and advisory. It has seen a compound annual growth rate of 17% in assets following a mainstream ESG integration strategy.
- Global green bond issuance hit $96 billion for the first eight months of 2017, almost matching the $99 billion issued in the whole of 2016, according to Bloomberg New Energy Finance. At this pace, BNEF expects $135 billion of new green notes in 2017, more than $12 billion over its initial forecast.
And the list goes on…
As an aside, the CFA Institute now includes ESG in all three Levels of its CFA program certification exams. The CFA also collaborates extensively with Principals for Responsible Investment (PRI) on everything from white papers on ESG in Equity Analysis and Credit Analysis to collaboration on 20 global workshops for professional investors, “designed to enable crucial understanding of how ESG issues are affecting share prices, bond yields, and bond spreads.” The CFA Institute is a venerable 70-year-old institution, formed in 1947, that has certified investment analysts in the U.S. for nearly that many years.
In my previous post on the AlphaSense blog , I discussed the importance of IR professionals expanding their understanding of sustainability, so they can constructively participate in related, internal strategy and external communications and performance discussions. Investor Relations Officers and Chief Financial Officers have traditionally worked closely together on developing company disclosure and communications – sustainability is a natural extension.
Therefore, in this post, I’ll share a few snippets to validate how sustainability’s shift to the mainstream is also compelling CFOs to comprehensively step up:
- First, several excerpts from the Ernst & Young (EY) article, How sustainability has expanded the CFO’s role:
– Sustainability issues and financial performance have begun to intertwine
– As ESG factors are incorporated into investment analysis, companies have started to view environmental and social initiatives as contributing directly to their economic performance
– Market pressures are requiring IR communications to provide more in-depth sustainability reporting… [to which] CFOs and their immediate reports must help corporate IR teams in this undertaking
- In a 2017 paper published by Deloitte, the authors also address the growing importance of CFO involvement with each company’s ESG / sustainability program, strategies and communications, at the intersection of sustainability and financial performance. They point-out that:
– Sustainability and company performance are, “inextricably linked,” and that the CFO is, “in the best position to define and communicate how a company’s management of ESG risks contributes to value creation”
– Studies show 80% of ESG disclosures are immaterial, which suggests CFOs are in the best position to help companies focus on the remaining ~20% that communicate material ESG / sustainability issues
– Recent developments demonstrate growing ESG / sustainability focus by investors, companies and policymakers, compel CFOs and C-suites to wake up to potential risks of [their] inaction
As I wrote about in another AlphaSense blog post, the expanding significance of sustainability in capital competition is clear. The imperative for the CFOs involvement with sustainability is also clear.
ESG / sustainability is a vast field with myriad considerations for both companies and investors’ attention. It is important to know that you can’t know it all, nor be involved in it all. While I have my IR colleagues in mind as I write these closing words of encouragement, they can apply to anyone who is working with competitive strategy and capital positioning, whether with, for or about publicly traded or privately capitalized companies…
Choose your areas for participation strategically. Utilize both internal and external resources for exponential assistance. And, above all else, approach ESG / sustainability with the intention to maximize optimal benefit to your company and investors.
1. CFA Institute: ESG Issues in Investing
2. AIC: American Investment Council
3. CAQ: The Center for Audit Quality
4. MAPI: Manufacturers Alliance for Productivity and Innovation
5. EPRI: Electric Power Research Institute
6. APICS: Association for Supply Chain Management
7. CSCMP: Council of Supply Chain Management Professionals
8. Robeco: Two Worlds Colliding, insights from three years of ESG integration
9. Contrast Capital: Looking Inside the Investment “Black Box”
10. Smart SynonymsTM, AlphaSense proprietary, AI-powered technology instantly expands your keyword searches while filtering out false positives.
11. JP Morgan Research Report, dated 18 July 2017, available on AlphaSense
12. Kepler Chevreaux Research Report, dated 7 September 2017, available on AlphaSense
13. Bloomberg Weekly Brief: Sustainable Finance (9-7-17)
14. Bloomberg Weekly Brief: Sustainable Finance (9-20-17)
15. CFA/PRI: ESG in Equity Analysis and Credit Analysis
16. CFA/PRI: Global ESG Workshops – September 27, 2017 Press Release
17. CFA Institute
18. EY: How Sustainability has expanded the CFO’s role
19. Deloitte: Seek and you may find, How CFOs can manage sustainability risks and long-term value in unexpected places
Pamela Styles is principal of Next Level Investor Relations LLC, an Investor Relations consultancy with dual IR and ESG / Sustainability specialties.