Almost four years ago, while being seconded from KPMG to the WBCSD, I was involved in a series of workshops aimed at involving the capital markets in sustainability. Reflecting now on the lively conversations that took place, I genuinely believe we have made some progress.
Although I never predicted events would unfold as they have, I was convinced that it was in the interest of capital markets to embrace non-financial information within their investment decisions / company evaluations. Recent events such as the economic crisis, political instability of oil-producing regions, scarcity of natural resources and environmental disasters have forced financial institutions and mainstream investors to rethink the material impact Environmental, Social and Governance (ESG) factors have on long-term business performance.
When speaking to members of the investment community, they inform me that a company’s management of ESG factors is seen as a proxy for risk management, management quality, business reputation, and fundamental to long-term performance.
What’s driving increasing investor interest?
Since the financial crisis we have witnessed the rapid growth and expansion of a number of investor-backed initiatives, most notably the UN PRI which has gone from 50 signatories in 2006 to over 800 in 2010, with assets of over US$22 trillion. Likewise adoption to the Equator Principles has also risen from 16 signatories (2003) to 68 (2010).
What these trends suggest is that the market is recognizing the value and importance of ESG factors. The corollary, of course, is that market recognition creates further interest from mainstream investors – who are responding to the changing risk-appetites of their institutional clients (e.g. pension funds).
Furthermore, the public reaction to the financial crisis and the Gulf disaster, together with the rapid emergence of whistle-blowing and social media sites such as WikiLeaks & Twitter are evolving the scope of enterprise-risk management systems and corporate reporting for leading companies.
What companies can do
I would suggest that companies become more proactive (and effective) in communicating ESG factors to mainstream investors. Companies can reduce this risk by taking the lead and incorporating ESG factors at investor meetings, quarterly earnings or roadshows. There are three actions companies can take to improve this process:
– Foster Internal Collaboration – by aligning Investor Relations & Sustainability departments
– Integrate ESG – by demonstrating how ESG performance will impact long-term success
– Speak their language – by framing ESG materiality in terms of business risks and opportunities
Moving forward, I expect that once market imperfections are corrected via regulation and when natural resources become more volatile, ESG will translate further – perhaps to the point where investors begin evaluating ESG performance like they do management quality or market risk.
Businesses need to be ready for this and start articulating on how ESG factors translate into business risks and opportunities. Companies who have strong data on ESG factors are more responsive to stakeholders and can react quicker to change, which will ultimately help drive long-term business performance.
Watch an IBLF Expert Insight video with Barend (below)