One of the most common misconceptions held when engaging investors on business performance is that they do not care about company CSR. The truth is, investors’ greatest interest lies in long-term profitability and viability of the business. In order to answer this requirement, investors rely heavily on sustainability performance of the company.
Latest Morgan Stanley study (Sustainable Signals, New Data from the Individual Investor, 2017) shows that 75% of investors are interested in sustainable investing, while the number climbs to 86 % for millennial investors. Sustainable or impact investing is a practice of investing in businesses or funds which is looking to achieve financial returns while pursuing positive social and/or environmental impact. Sustainability in this context is commonly referred to as ESG performance (environmental, social and governance). Since the last study conducted in 2015, there has been a growing rate of sustainable and impact investing in the U.S. rising from $6.57 trillion to $8.72 trillion, a change of 33%.
Companies need to know their sustainability performance
Why is that companies often do not recognize there is any investor demand for information on ESG performance? It is often because the information required from investors is not clearly labelled as ESG or sustainability related. Question coming from investors can include the number of hires or sales following a scandal company had gone through, changes in internal management systems or the effects of penalties or sanctions imposed on the company – all of which are ESG issues. Investor interest often extends to long-term business strategy, in which the business is expected to cover all relevant risks connected to sustainability. Investors are well-aware of the fact that long-term success of a company is dependent on its ability to identify sustainability risks posed to their business. That is why they increasingly demand to be presented with annual reporting demonstrating progress on ESG targets.
Transparency is key
What matters most, however, is transparency of ESG information. Investors decision-making is greatly influenced by public availability and comparability of required data. Important factor in evaluation of ESG information is also their balance. It is too often that companies fall in the trap of disclosing only the good stuff. CSR and sustainability strategies and goals should cover all risks posed to their business as well as any failure to reach established targets. Disclosing explanation on poor performance scores more points in the eyes of investors than perpetuating silence on these matters.
Better-quality data is required
This does not mean investors require more information, they only depend on better quality data. Although companies now realize the importance of including stakeholder views in their materiality assessment, they often neglect to engage all of their investors. In effect, many sustainability reports fail to tie their sustainability performance to financial outcomes. This, however, is exactly the type of information essential for investor decision-making.
What does the London Stock Exchange say?
“When using ESG data to inform capital allocation and investment decision-making, investors want ESG information to be complete, consistent, reliable, comparable and clear.”
(LSEG, ESG reporting guidance)
According to London Stock Exchange and their ESG reporting guidance, the key elements of sustainability/ ESG reporting needed by investors are:
- Accuracy: deploy rigorous data collection systems
- Boundaries: align to the fiscal year and business ownership model
- Comparability and consistency: use consistent global standards to facilitate comparability
- Data provision: provide raw as well as normalised data
- Timeliness: provide data to coincide with the annual reporting cycle
- External assurance: consider strengthening the credibility of data by having it assured
- Balance: provide an objective view, including both favourable and unfavourable information
Sustainable investment trend gains stock exchange support
While majority of investors now routinely analyse information on ESG performance alongside other financial and strategic information, the perception of trade-off between sustainability and financial performance remains the greatest barrier to mainstreaming the movement according to the Morgan Stanley study (2017). Despite this perception, investor pressure on reliable ESG performance data is increasing and many world stock exchanges keep up with the pace as one by one they issue their ESG reporting guidelines in order to help companies answer this pressure.
Latest stock exchanges promoting quality ESG reporting are for example London Stock Exchange, Nasdaq Nordic and Baltic exchanges, Norwegian stock exchange Oslo Børs, Spanish Bolsas y Mercados Españoles or Qatar Stock Exchange.
More information on all stock exchanges that have issued ESG reporting guidelines is available through Sustainable Stock Exchanges Initiative website.