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Market trends
Pamela Styles
|
March 19, 2019
7 min read
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 in many directions. I chose three to explore for the purposes of this blog:
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:
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 utility 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:
The study researchers also found that analysts identified mechanisms by which sustainability impacted profitability, i.e.:
“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 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:
Recognizing when investors are actually driving a conversation about ESG/Sustainability with corporations 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:
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[15] 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.”[16] 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:”
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:
As I wrote about in another AlphaSense blog post, the expanding significance of sustainability in capital competition is clear. The imperative for the CFO’s involvement with sustainability is also clear.
ESG/Sustainability is a vast field with myriad considerations for both company’s 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 the optimal benefit to your company and investors.
Pamela Styles is principal of Next Level Investor Relations LLC, an Investor Relations consultancy with dual IR and ESG/Sustainability specialties.
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