Investors see benefit of sustainability, but at odds with business leaders on measuring its value
LONDON, 11 September 2014
Companies are struggling to effectively communicate with investors on sustainability, finds a new study undertaken by the Principles for Responsible Investment. Eighty-eight percent of investors surveyed see sustainability as an opportunity for competitive advantage and 78 percent as a differentiator in determining industry leaders. But despite this belief, investors are struggling to embed analysis of sustainability in their investment process: 91 percent believe that sustainability should be better embedded into discussions between companies and investors, and 88 percent believe that they should pay greater attention to sustainability in company valuations.
“The Investor Study: Insights from PRI Signatories” features in-depth interviews and survey contributions from almost one hundred of the Principles for Responsible Investment’s largest institutional investors. It was co-written by Accenture and conducted as a companion study to the UN Global Compact-Accenture CEO Study on Sustainability, published in September 2013.
One of the clearest insights is that business leaders may currently overestimate their success in communicating with investors on sustainability. 57 percent of CEOs surveyed in the UN Global Compact-Accenture CEO Study reported they are able to set out their strategy for seizing opportunities presented by sustainability; when asked the same question of the companies in which they invest, just 9 percent of investors believe this to be the case. Similarly, while 38 percent of CEOs believe they are able to accurately quantify the business value of their sustainability initiatives, just 7 percent of investors agree – a striking gap which exposes the shortcomings of many companies in effectively communicating their approach to sustainability and its links to the traditional measures of business value and success.
This gap is further evident in companies’ behaviour on sustainability measurement and reporting: 74 percent of business leaders say their company measures both positive and negative impacts of their activities on sustainability outcomes; but just 17 percent of investors believe this to be the case for the companies in which they invest. And 47 percent of CEOs report that they routinely incorporate sustainability issues into discussions with financial analysts – an experience reported by just 27 percent of investors.
Helene Winch, Director of Policy and Research at the PRI, commented, “Since the PRI was established in 2005, we’ve seen more than 1,000 institutional investors commit to integrate sustainability issues into their investment decision-making and ownership practices. Our study shows that commitment and understanding is now widespread among the investment community, but real impact in embedding sustainability into global markets will depend on closer engagement, a sustained focus on materiality and business value, and a commitment to the long-term.
Investors also recognise shortcomings in their own approach, highlighting a lack of understanding of the value of sustainability within their own organisations, as well as structural challenges in financial markets. Many CIOs at institutional investors identify challenges in moving from a risk-based approach to a broader understanding of the ways that sustainability can contribute to traditional measures of business success. Difficulties in embedding the knowledge and skills throughout their organisations, and challenges in identifying material issues for analysis, are preventing investors from taking full account of sustainability issues in company assessment and valuation: just 10 percent believe that the majority of company share prices include value attributable to sustainability initiatives.
Investors also see challenges in short-termism: 71 percent believe that short-term financial investments are making sustainability efforts more difficult for companies. Nearly half of the investors surveyed, 49 percent, identify quarterly reporting requirements as an important barrier to further progress, with nearly two-fifths saying that they would abolish quarterly reporting requirements if it were in their power.
“This study points to the realities regarding common misconceptions on the critical role that sustainability plays on both sides of the company-investor dynamic,” said Georg Kell, UN Global Compact Executive Director. “Indeed good work is already underway to address many of these misconceptions and to better align companies and investors on matters such as sustainability valuation and overcoming a short-term approach to financial decision making.”
“Our research exposes a striking gap between CEOs and investors on sustainability. Both parties clearly believe that sustainability is critical to success, but are not communicating effectively,” says Peter Lacy, managing director, Accenture Sustainability Services. “To drive real change in global markets, CEOs and investors told us that they see a need for urgent action in three key areas. First, business leaders need to get better at setting out how sustainability can generate new opportunities in new markets, and clearly demonstrate the business value of taking sustainability seriously; second, investors need to build the skills of their people in understanding and assessing sustainability; and third, governments need to give investors the regulatory landscape they need to invest for the long-term.”
Drawing on in-depth interviews with CEOs and CIOs of PRI signatories, the study identifies five key pathways towards better integration of sustainability into the investment process:
- Long-term investment mandates: Together with a more concentrated portfolio that allows for greater understanding and engagement, a commitment to the long-term can help investors and companies work together to drive superior performance on both sustainability and financial returns.
- Focus on opportunity and value: Investors and companies must move the dialogue on sustainability beyond risk management and mitigation to a new approach focussed on opportunity and business value. A sustained focus on the linkages between sustainability and business value, investors believe, would allow greater attention on sustainability in company assessment and valuation, and incentivise institutional investors to develop a more sophisticated approach to assessing performance and potential.
- New knowledge and capabilities: To integrate sustainability into the investment process, investors see a need to strengthen the knowledge and capabilities of their people and their agents. Building knowledge and skills must be backed up with the right compensation, incentives and measures of long-term success.
- Common metrics and understanding: A common understanding of the material contribution of sustainability issues to company success could prompt greater strides in investors’ efforts to assess and reward companies appropriately. Common metrics, shared throughout industry sectors and treated with similar rigour to financial measures of success, would enable a more accurate comparison of performance and identification of industry leaders.
- Engagement with governments and policymakers: while the majority of investors see government intervention as a potentially powerful route to move beyond isolated examples of best practice, and towards a more sophisticated, industry-wide approach to sustainability, many describe policymakers’ efforts as disjointed and fragmented. Business leaders and investors alike believe that with a commitment to action, the private sector can collaborate with policymakers to reshape markets and systems to reward sustainability leaders, and enable business to lead the way in tackling global challenges.