BUSINESSES OUT OF SYNC WITH INVESTORS ON SUSTAINABILITY

From the fossil fuel divestment movement to campaigns highlighting the risks associated with factory farming, the investment community is coming under increasing pressure to place environmental and societal issues at the heart of investment decisions. Now, new research has shown that a worrying gap has emerged between the importance investors place on a firm’s sustainability credentials and firms’ perception of the importance of sustainability to investors.

A recent study on corporate sustainability from MIT Sloan Management Review (MIT) and the Boston Consulting Group (BCG) found that 75% of senior executives in investment firms agree that a company’s good sustainability performance is materially important when making investment decisions. However, only 60% of managers in publicly traded companies believe that good sustainability performance is materially important to investors’ investment decisions.

The research implies that the 40% who don’t feel that sustainability is important to investors should think again. Three quarters of the investors surveyed believe sustainability creates tangible value for a company, including improved revenue performance and operational efficiency, while 60% believe that solid sustainability performance reduces a company’s risks and lowers a company’s cost of capital.

And if companies need further convincing that investors truly care about their sustainability credentials, nearly half of investors say that they won’t invest in a company that underperforms on sustainability with some 60% of investment firm board members saying they are willing to divest from companies with a poor sustainability footprint.

What’s clear from this glimpse into investor attitudes is that the corporate world has gone way beyond framing sustainability around the moral case for action and is now looking at it through a hard-nosed business lens. Yet while almost 90% of corporate leaders say that a sustainability strategy is essential to remaining competitive, only 60% of corporations have such a strategy in place and a mere quarter say their companies have developed a clear business case for sustainability.

This is concerning, but not entirely surprising. Although identifying big, overarching sustainability priorities is a relatively straightforward exercise, putting hard figures on abstract concepts such as supply chain security and reputational risk is notoriously challenging. But it’s a challenge businesses need to accept and meet. The MIT and BCG research shows that organisations that have made a sustainability-related business model change are twice as likely to report profit from sustainability than companies that haven’t.

On the flip side, firms who still believe sustainability is largely a PR-led, ‘nice-to-have’ bolt on to business as usual risk becoming increasingly isolated in a world where investors are placing their bets on businesses whose actions speak louder than their words.