Do investors care about companies' climate change disclosure?
<p>When it comes to rewarding transparency and ESG performance, there is a big gap between investor commitment and action.</p>
Taken at face value, more evidence surfaced this month supporting a close relationship between company market performance and the disclosure of environmental, social and governance criteria. Less clear is when more investors will reward ESG disclosure and inspire nondisclosing companies to get on board.
Integrating fundamental equity analysis with ESG criteria boosts the quality of investment decisions, according to the Principles for Responsible Investment.
A similar assessment by Deloitte outlines both the short- and long-term implications of ESG investment management. Further, the Carbon Disclosure Project now has 722 institutional investors representing $87 trillion in assets requesting companies to report their carbon emissions and climate change strategies. This same investor group is also asking companies to report on water and forest use, reflecting a heightened awareness of natural capital and environmental costs.
In 2012 more than 80 percent of the world's largest companies used CDP's carbon reporting system. Carbon Action, a CDP initiative focusing on the highest-emitting companies, seeks to accelerate emission reductions, increase energy efficiency initiatives and bolster risk management while generating positive return on investment. The largest new signatories include JPMorgan Chase, Banco do Brasil and the first signatories from Taipei, including Cathay Financial and Fubon Financial Holdings.
There is also growing awareness of water as a critical business issue with signatories to CDP's water program reaching 530, up 13 percent from last year. That is twice the number of signatories to CDP's forests program, which reached 184 with $13 trillion in assets. In the context of organizational change, these statistics demonstrate the push investors are making for companies to voluntarily report their ESG credentials.
In its 2013 State of Green Business Report, GreenBiz Group and Trucost released figures showing U.S. companies' total environmental costs as a percentage of their revenue are nearly equal, making these companies vulnerable to extreme weather-related events and other systemic "shocks" to their business operations.
One could assume a new era of "conscious capitalism" has truly arrived when they factor in the meteoric rise of socially responsible investment funds, the growing base of market exchanges requiring listed companies to report their ESG policies and impacts, such as the Nasdaq OMX and London Stock Exchange, and the constituency of environmentalists targeting divestment by pension and university endowments from the fossil fuel industry.
Given this "state of green business," is it fair to ask if companies reporting their ESG credentials have sufficiently engaged their own investor relations teams? Are mainstream investors, in turn, engaging with company management and listening to the whole story? Finally, is investor support of ESG disclosures strong enough for nondisclosing companies to get on board and do the same?
The response is mixed. The investor relations function can be a potent advocate for and communicator of the company's ESG performance and value. The investor relations department needs to be informed internally and engaged externally to ensure the company's narrative resonates with the broader investor community. This two-way dialogue can be accomplished through an additional investor relations conference call per year, or perhaps integrated into the investor presentations.
The vast majority of investment capital is still directed to assets judged best to deliver risk-adjusted appreciation rapidly with little direct concern for the environmental and social impacts core to the CDP and other ESG disclosures. Meyer "Sandy" Frucher, vice chairman of the Nasdaq OMX, confirmed that exchanges and ESG investors have made little impact, saying most institutional investors have not integrated ESG criteria into their portfolio selection processes, and even fewer report their returns based solely on ESG criteria.
A wide gap exists between investor commitment and action to reward transparency and ESG performance. Unless companies engage with and help their investors see that ESG issues should be integral to their analysis and decision-making process, investment funds will likely not correlate to sustainable business. Likewise, investors need to listen to the whole story and integrate ESG criteria into company performance valuations.
Image by Simon James via Shutterstock.