Investing for a sustainable future

Investors Care More About Sustainability than Many Executives Believe.
Investors see a strong link between corporate sustainability performance and financial performance — so they’re using sustainability-related data as a rationale for investment decisions like never before.

Executive Summary
Many executives embrace the conventional wisdom that mainstream investors care little about an organization’s performance on environmental, social, and governance (ESG) metrics. Few companies make it a priority to communicate their sustainability performance to investors, or even develop a robust story about their sustainability performance. Why should they? Investors won’t shift their investments, the thinking goes, based on a company’s ESG performance. However, a growing number of investors are paying attention to ESG performance, as evidence mounts that sustainability-related activities are material to the financial success of a company over time. Investors care more about sustainability issues than many executives believe.
Understanding investor priorities is an important responsibility for a company’s top executives and its board of directors. Based on their understanding of investor interests, an organization’s leadership will often focus corporate strategy and behavior in one direction rather than another. If executives believe that their investors prioritize short-term profits, they will tend to organize sales, cost management, and research and development activities to maximize such profits rather than make certain long-term investments. With greater numbers of investors making investment decisions based on sustainability performance, it is time for corporate leaders to recognize that an increasing number of shareholders are (literally) invested in whether a company’s ESG activities connect with its financial success. How should corporate leaders respond to this growing interest in sustainability among mainstream investors?
A significant barrier for many organizations is that they don’t have a strong story to tell — yet — about their company’s ESG performance. Most companies acknowledge the importance of a sustainability strategy to their overall competitiveness, but only a minority of managers report that their organizations have developed a business case for their sustainability efforts.
This global executive study on corporate sustainability from MIT Sloan Management Review and The Boston Consulting Group (BCG) presents an in-depth analysis of investors’ new ability to connect sustainability performance with corporate performance, discusses how investors are using sustainability performance as a key criterion for making (and leaving) investments, and identifies what corporate leaders can do to stay relevant to sustainability-oriented investors. Below are six key findings that emerged from our 2015 survey of more than 3,000 managers and investors in organizations from over 100 countries.

  • Managers’ perceptions of investors are out of date: seventy-five percent 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.
  • Investors believe that sustainability creates tangible value: seventy-five percent cite improved revenue performance and operational efficiency from sustainability as strong reasons to invest. More than 60% believe that solid sustainability performance reduces a company’s risks. Nearly the same number also strongly believe that it lowers a company’s cost of capital.
  • Investors are prepared to divest: nearly half of investors say that they won’t invest in a company with a record of poor sustainability performance. Some 60% of investment firm board members say they are willing to divest from companies with a poor sustainability footprint.
    There is a lack of communication within corporations and investment firms and between them: At investment firms, more than 80% of board members believe that their companies engage in responsible investing. But only 73% of middle managers and 62% of front-line employees have the same opinion. In corporations, nearly 80% of board members and 85% of C-suite executives are fully informed about their organization’s sustainability efforts. But only 51% of senior managers and 31% of middle managers and front-line employees are equally well informed. The communication gap between investors and corporate management is just as large. According to investor respondents, sustainability issues arise in only 54% of the earnings calls and shareholder meetings they attend.
  • Sustainability indices are losing their luster: just 32% of managers in public companies say their business is listed on a sustainability index. While more than 90% of these managers say their companies promote inclusion on these lists, only 44% say such honors are important. Investors are even more critical: Only 36% say that being included on a major index is an important factor in their investment decisions.
  • Although a sustainability strategy is considered important, few companies have developed one: this gap has been a consistent finding in all the years of our study. In 2016, nearly 90% of respondents say that a sustainability strategy is essential to remaining competitive. However, only 60% of corporations have such a strategy. Although a clear business case is central to the strategy, only 25% of respondents say that their companies have developed one. Business model changes are also central. Organizations that have made a sustainability-related business model change are twice as likely to report profit from sustainability than are companies that haven’t.

By: Gregory Unruh, David Kiron, Nina Kruschwitz, Martin Reeves, Holger Rubel, and Alexander Meyer Zum Felde
May 11, 2016