How to make Wall Street notice sustainability leaders
Companies that have made sustainability a core element of their business strategies often find that their efforts deliver significant value. The gains in the marketplace can come in the form of reduced risk, lower costs, sustainability-driven market opportunities and top-line growth, or intangible benefits such as greater customer loyalty, higher brand value or improved ability to recruit and retain top-notch employees.
But many sustainability leaders report frustration in translating their sustainability-related competitive strengths and corresponding profitability into improved stock market results. As Joel Makower noted in August in “Why sustainability leaders don’t impress Wall Street,” investors seem unconvinced that strong sustainability performance delivers shareholder value. More specifically, he argues that investors don’t have the data they need to connect the dots.
Makower concluded, however, that the situation seems to be improving as more data become available from Bloomberg, MSCI and other sources — and as companies learn to “tell their story.” But I see a risk that robust sustainability data may get harder to come by as many companies, frustrated by the seemingly increasing demands to fill out more surveys and provide more data and by the lack of payoff for such efforts, pull back on their sustainability reporting.
Moreover, the problem runs deeper than a lack of data and the inability of companies to convince investors that their sustainability initiatives will translate into shareholder value. As David Lubin and I argued in a recent MIT Sloan Management Review piece, “Bridging the Sustainability Gap,” the very structure of the existing environmental, social and governance data makes it hard to tell a compelling story about sustainability-driven success. We identify several problems that need to be addressed.
First, much of the existing ESG data derives from an era where the only investors interested in environmental performance and other aspects of sustainability were “values” investors who wanted to exclude polluting companies and other “bad actors” from their portfolios. Given this focus, the data collected and reported has tended to center on environmental problems rather than "Green to Gold” opportunities.
Today, a wider range of investors has begun to care about sustainability performance. Investors want to know which companies deliver sustainability-driven growth, productivity gains and risk reduction. These “value” investors need a different set of sustainability metrics, notably indicators more tightly focused on the link to financial results.
The need for new metrics highlights the second problem with the existing ESG information: the sprawling nature of the data. In fact, hundreds of sustainability metrics are available. But there is little clarity on what is important or “material” and even less information on how the data being reported might translate into shareholder value. What is critical to engaging the broad investor community are metrics that are meaningful from an investor perspective rather than from an environmentalist point of view. Thus, we argue for a “value driver model” that centers on a core set of sustainability metrics cast in language familiar to the Wall Street world.
Third, we believe that the existing ESG data focus too much on surveys and “intent” and not enough on execution. Having a sustainability vision or a “green” strategy does not necessarily translate into on-the-ground results. Indeed, some strategies are poorly designed and others don’t get put into action. Yet others succeed on their own terms but are too narrowly focused on environmental goals to deliver economic gains alongside of better environmental results.
Finally, a good bit of the ESG data now reported does not meet basic Quality Assurance standards. Too much of the material is based on company self-reporting with no systematic structure of auditing or crosschecking. Moreover, methodological inconsistencies in how corporations report on basic metrics — such as greenhouse gas emissions — renders these indicators less than useful in a benchmarking context. Investments in new data sets and methodological consistency, which would provide a stronger foundation for comparative analysis, are being made by the Sustainable Accounting Standards Board (SASB) and others. But the lack of uniform reporting structures remains a major issue.
The world needs an accepted framework for sustainability reporting that would facilitate cross-company and even cross-industry comparisons. Success in this regard requires a pared focus on a core set of sustainability metrics with particular emphasis on ones that translate into financial advantage. As Makower’s article stresses, simplicity matters.
In this regard, David Lubin and I have proposed a straightforward "S/GPR" metrics framework, which seeks to provide a mechanism for companies to share data on their sustainability-driven (S) growth (G), productivity gains (P), and risk mitigation (R). We believe that this tightly focused “value driver” model offers a way to connect with investors and Wall Street analysts on terms they understand.
We note that a number of companies — such as GE, Pirelli, Kimberly-Clark, Dow and DuPont — have begun to report on their sales of environmentally oriented products and services. For example, Kimberly-Clark identifies 22 percent of its net sales in 2012 as coming from “environmentally innovative products,” up from 13 percent the year before. And we believe that companies could develop similar metrics for sustainability-driven “eco-efficiency” gains and productivity advances, particularly through the use of enterprise resource planning software. With regard to reporting on the mitigation of sustainability-related risks, the challenge is to sift through and refine the existing metrics so as to isolate critical risk factors that connect to a company’s strategic direction and financial performance.
A handful of companies have stepped out in front in terms of delivering sustainability metrics that are oriented to the needs of investors and stock market analysts. Dow and DuPont are each working to capture and report on their sustainability-driven business outcomes in ways that will make it easier for mainstream investors to credit them for their sustainability initiatives.
In a world where natural resource constraints, pressures for greater pollution control, changing energy market dynamics and climate change impacts promise to be ever bigger factors in terms of business success, companies will find a growing logic for spelling out their sustainability vision and strategy — and then measuring (and reporting) on their success in executing on these strategies in ways that materially improve business results.
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