If the bottom-line business case for sustainability is so compelling, why aren’t more companies aggressively taking environmental, social and governance (ESG) action? I get that question a lot.
Some companies are waiting for stronger signals from investors that ESG efforts matter to them. Investors and lenders -- the capital markets -- have been skeptical that ESG matters to company performance and generally have not required companies to disclose their ESG efforts.
Investor disinterest dampens company action. In turn, lack of company action on ESG fuels investor skepticism. It’s a vicious circle that needs to be molded into a virtuous circle, where capital markets reward corporate sustainability performance with the capital and credit it deserves.
But that lack of interest from capital markets is changing. Until recently, investors made decisions based largely on a company’s track record, believing that past performance was a proxy for future success. But now, all bets are off.
The future will be different. Coming changes are highlighted in KPMG’s recent “Expect the Unexpected” report, which shows how 10 “global sustainability megaforces” will affect firms.
Once these megaforces were seen as irrelevant externalities, or someone else’s problem. Now their disruptive impacts on business are becoming unavoidable and increasingly significant. These impacts are big enough to intensify risk and volatility, the two nemeses of successful long-term investing. Together, they’re a disruption that can’t be ignored.
Capital markets now want to know if a company can handle the related risks and opportunities. Lenders ask: Can a company pay back its loans? How should we adjust our lending rates? Investors ask: Will a company continue to deliver a healthy return on our financial capital? Is it being a good steward of the natural and social capital on which it depends?
New guidance for ESG in capital markets
By 2015, three new initiatives will provide capital markets with insights about how future-proof a company is. Individually, these efforts address firm ratings, voluntary reporting and regulatory disclosure. Together, they will cause a sweeping change in how capital markets treat ESG.