Sustainable investment growing, but companies are failing to communicate.
With so many off skiing soon, I was thinking of the World Economic Forum in Davos. Jealous? Me?
One of the papers presented there was “Accelerating the Transition towards Sustainable Investing”, to which I contributed. I was reminded of it this week, by the launch of an interesting Economist intelligence Unit study of how limited was corporate reporting on sustainability goals and practices.
First things first. The WEF study argues – and evidences – that a sustainable investing approach provides opportunities for generating superior risk-adjusted financial returns, especially for investors that can adopt a longer-term investment horizon. However to accelerate this move to sustainable investing, some “functional” and mindset changes at investors need to take place.
Functional changes. Linking incentives in the investment value chain more towards superior risk-adjusted financial performance over the long-term. For example, by increasing the performance assessment period for fund managers, and including ESG factors as indirect financial performance criteria for corporate executives.
Buy- and sell-side analysts working with IR teams to determine key performance indicators for financially material environmental, social and governance factors at sector level. The study also suggests – more controversially – that asset owners use their mandate to encourage asset managers to incorporate these factors in their stock picking.
The research also highlights that some ‘mindset’ changes are needed among fund managers. Recognition of ESG indicators as drivers of business value, and sustainability integrated into core business strategies - have the potential to strengthen the financial performance of companies.
Meanwhile the Economist Intelligence Unit has had a tilt at the corporate disclosure of environmental, social and governance sustainability goals. Less than 1 in 5 does so on an annual basis. And there is a strong trend that companies in emerging markets do so far more effectively than in developed economies.
The study also proposes that customers have the strongest influence on their ESG policies—more than any other stakeholder, although the influence of regulators and investors appears to be growing.
Many managers don’t ‘get’ the opportunities: only 14% see a link between sustainability and short-term profit, even though some ESG initiatives pay off in under a year. And executives are divided on the merits of integrated financial and sustainability reporting. Some business leaders cite the advantages of targeting individual stakeholder groups with information most relevant to them.
The relationship between ESG and long-term financial performance is crystallising. One implication is that poor performance on sustainability could restrict access to capital.
Whilst the messages may not be sparklingly new, the messengers certainly are. Time to buy in to this new investor world?
One of the papers presented there was “Accelerating the Transition towards Sustainable Investing”, to which I contributed. I was reminded of it this week, by the launch of an interesting Economist intelligence Unit study of how limited was corporate reporting on sustainability goals and practices.
First things first. The WEF study argues – and evidences – that a sustainable investing approach provides opportunities for generating superior risk-adjusted financial returns, especially for investors that can adopt a longer-term investment horizon. However to accelerate this move to sustainable investing, some “functional” and mindset changes at investors need to take place.
Functional changes. Linking incentives in the investment value chain more towards superior risk-adjusted financial performance over the long-term. For example, by increasing the performance assessment period for fund managers, and including ESG factors as indirect financial performance criteria for corporate executives.
Buy- and sell-side analysts working with IR teams to determine key performance indicators for financially material environmental, social and governance factors at sector level. The study also suggests – more controversially – that asset owners use their mandate to encourage asset managers to incorporate these factors in their stock picking.
The research also highlights that some ‘mindset’ changes are needed among fund managers. Recognition of ESG indicators as drivers of business value, and sustainability integrated into core business strategies - have the potential to strengthen the financial performance of companies.
Meanwhile the Economist Intelligence Unit has had a tilt at the corporate disclosure of environmental, social and governance sustainability goals. Less than 1 in 5 does so on an annual basis. And there is a strong trend that companies in emerging markets do so far more effectively than in developed economies.
The study also proposes that customers have the strongest influence on their ESG policies—more than any other stakeholder, although the influence of regulators and investors appears to be growing.
Many managers don’t ‘get’ the opportunities: only 14% see a link between sustainability and short-term profit, even though some ESG initiatives pay off in under a year. And executives are divided on the merits of integrated financial and sustainability reporting. Some business leaders cite the advantages of targeting individual stakeholder groups with information most relevant to them.
The relationship between ESG and long-term financial performance is crystallising. One implication is that poor performance on sustainability could restrict access to capital.
Whilst the messages may not be sparklingly new, the messengers certainly are. Time to buy in to this new investor world?
posted by Mark Hynes @ 2:30 pm
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