What investors need to know from companies about sustainability
The business case for adopting a sustainable business strategy never has been clearer. The National Climate Assessment and the United Nations Intergovernmental Panel on Climate Change warn of a coming economic decline unless we aggressively reduce greenhouse gas emissions within the next dozen years. Congress is considering legislation to price carbon. Consumers are increasingly interested in how companies behave on environmental, social and governance (ESG) issues. And ESG investment has doubled over the last three years and now represents $1 of every $4 invested in the United States.
Indeed, Larry Fink, CEO of BlackRock, the largest asset manager in the world, told portfolio companies to realize that “profits and purpose are inextricably linked.”
In turn, companies are responding to these market signals. Ceres research found that among 600 of the largest publicly traded companies in the U.S., nearly two-thirds have commitments to reduce greenhouse gas emissions, half are actively managing water resources and nearly half are actively protecting the human rights of their employees.
At this unique moment, where corporate action and shareholder interest are becoming so well aligned, it should follow that companies are consistently highlighting for investors how they mitigate environmental and social risks and position themselves for success.
The unfortunate reality, however, is that while nearly half of the largest U.S. companies are communicating with investors on sustainability issues, the vast majority are doing so in ways that continue to reinforce the misconception that sustainability is a “nice to do” rather than material to financial well-being. They fail to communicate sustainability as an integral part of their decision-making, as something that drives resilience, operational efficiency and innovation — and that ultimately, strengthens the bottom line.
Why aren’t CEOs and CFOs jumping at the chance to talk about sustainability? For many companies, engagement with investors on ESG issues can be met with trepidation and resistance. Corporate disclosures and presentations too often presume that investors have only short-term priorities. This focus on the short-term, coupled with a lack of understanding of broader investor expectations for corporate sustainability, has led to companies reacting to requests rather than proactively sharing and highlighting ESG related information.
At Ceres, we often hear from companies whose investors simply aren’t asking questions about ESG. But our latest report, "Change the Conversation," argues that companies simply can’t afford to wait for those questions to come. When companies don’t engage effectively with investors on their sustainability efforts, they miss opportunities to differentiate themselves from peers. Rather than gaining a competitive advantage, they leave the financial value of sustainability out of critical conversations.
Based on insights gathered from Ceres Investor Network partners, "Change the Conversation" offers companies investor-informed recommendations for how they more effectively can provide the investment community with the information it values, and in ways investors will be likely to use it. By taking control of the narrative, companies doing the hard work of developing sustainable business strategies can demonstrate to investors how they benefit in supply-chain resilience, stranded-asset avoidance, cost savings and efficiency, improved product performance and increased employee retention.
For example, in one of its most recent investor-directed disclosures, JetBlue specifically identified the immense risk that climate change poses for its business. With its operations in the Caribbean, the rise of extreme weather events such as the recent hurricanes in the region present real challenges and real business risk. While acknowledging and explaining this risk to its investors, JetBlue also talks about how it is proactively managing and preparing for more frequent and stronger hurricanes and how that sets them apart from their competitors.
JetBlue describes its approach to climate change as a competitive advantage. This is an important shift — one that resonates with investors, and one we need to see more of.
Risk and good governance
From the company perspective, sustainable business leadership is too often defined by topping the Dow Jones Sustainability Index or by being the first company in an industry to announce an ambitious commitment to reduce greenhouse gas emissions or release a new sustainable product innovation. For investors, though, sustainable business leadership is often much simpler: Investors care about risk and good governance.
What our interviews with investors in our network affirmed is that while data on ESG issues can provide a good sense of a company’s current and past performance related to material risks, context matters. Investors want to know the details of how sustainability is integrated into governance systems — at the board and management levels — in order to gain critical insight into whether the company is likely to sustain that performance into the future.
Also critical to investors is understanding how a greater focus on sustainability drives improved financial performance. Where possible, investors want to see companies quantify how investments in sustainability translate into cost savings, market expansion and revenue growth.
The messenger matters, too. Investor relations teams, the C-suite, members of the board — those company representatives who speak with investors regularly need to initiate conversation on the business case for sustainability. Many investors we interviewed shared their frustrations with being channeled to the sustainability experts immediately. They explained that while sustainability officers should be part of the conversation, investors also need to hear from executives that have a common understanding of ESG and financial performance.
One company we have seen deploy its C-suite as the messenger is Nike Inc. In 2017, the company announced to its shareholders that 50 percent of its growth over the next five years would be from innovation. In a 2018 video to investors, Nike’s CFO, Andy Campion, shared that sustainable innovation would be an integral part of that strategy. He reported that the company’s sustainably innovated FlyKnit technology had generated more than $1 billion since launch and is quickly approaching $2 billion in revenue growth for the company. These are the kinds of numbers that stick with investors.
Communication is a two-way street, and while companies have a significant role to play by demonstrating to investors how sustainability strengthens their bottom line in both the short- and long-term, investors, too, must do their part. As companies move to implement the recommendations laid out in "Change the Conversation," they will be looking for investors to demonstrate how increased ESG integration and disclosure are rewarded in investment decision-making. Investors need to show they also understand that ESG issues are material financial matters through the questions they ask and the expectations they set for companies across their portfolios.
As our world has changed, so, too, have investor expectations. Now it’s time for companies to change the way they engage with their investors. It’s time to change the conversation.