The term investor can be used to cover a wide range of people and organisations, including professional fund managers, banks, pension funds and individual members of the public. But they all have one thing in common, they want to get value from the money they invest - either from dividends or capital growth. Their decisions will be taken in the light of the size of the likely returns and the risks they are prepared to accept to achieve them.
So where does sustainability fit? Well for a long time it didn’t, it was seen as a bit of a side show and often it was what companies wanted their investors to care about rather than what they actually did. Over the years though it has become something that investors are interested in, simply because there are opportunities that come from sustainability and, often more front of mind, there are potential risks. As a result, the demands on companies to disclose information is growing and the balance has shifted in most sectors to an investor pull versus a company push.
So as a sustainability manager you will need to consider these stakeholders in your planning. If you think sustainability is full of acronyms and jargon, wait until you get into the investment world! They often won’t even talk about sustainability – it’s ESG to them (Environment, Social and Governance). This is an important distinction, as the role of a sustainability team in an organisation usually has a very heavy focus on the environment (particularly climate) with some social elements, although as we have seen in other articles, many of these will actually be managed by HR and others. However, the governance side of things may not be part of the sustainability manager’s remit at all, often sitting with finance and or the company secretary. Whilst in the UK much of what is required under G is covered by regulations, it is still being aware of what information investors require in this area and what topics should be on your radar.
Sustainability information for investors is often referred to as “non-financial disclosures”, in that you will usually be disclosing metrics other than financial to show current status and progress. But make no mistake, investors want to turn this into something they can enter into their spreadsheets to turn it into a financial return or risk in some way. So how do they do this?
Many investors use specialist sustainability rating companies like Sustainalytics or MSCI to do the work for them. They will look at public disclosures across a wide range of sustainability topics and give a numerical score or a letter to rate performance. At the simplest level, a bad rating would feed into a higher risk rating for the company. More sophisticated analysis can be done by looking at each topic differently, assigning different weightings and looking at risks and opportunities separately. But investors have been frustrated by how these ratings vary, with a company being shown as a leader by one rating company and a laggard by another. So many of the big investors will do their own research instead, allowing them to reflect their own priorities instead of relying on rating providers whose methodology may not be completely obvious.
Companies therefore have a difficult task in working out what their own investors are looking for, with some using one rating provider, some another and others relying on in house research. That’s where someone like CEN Group can help. They look across all the different rating agencies and various sustainability standards to produce a synthesised list that can be compared to current disclosures, leading to a set of recommendations to bridge the gap. So, you can focus your efforts on the topics that are likely to have the biggest impacts for your investors. Of course, this will still be grounded in the most material topics for your industry and company, but it helps to fill in policy or data gaps.
Over the years there has been an increasing desire for some information to be disclosed in a standard way, so that meaningful comparisons between companies can be made. Perhaps the most impactful initially was TCFD (the Taskforce for Climate-related Disclosures). The aim of this was to create a standardised way of looking at the risks and opportunities from climate that can be used by the finance community. Indeed, it was created by the finance industry itself and includes not just a requirement for companies to disclose, but also for the investors themselves. So, a large pension fund in the UK must produce a TCFD report including metrics about its investments, which in turn creates a pressure on companies to increase climate performance.
In Europe, the Corporate Sustainabiltiy Reporting Directive (CSRD) is gradually being rolled out, creating a much bigger requirement for companies to report across a full range of metrics, even if they are not headquartered in Europe. Underpinning this is the concept of double materiality – what impacts does the company have on the environment/society, and how sustainability aspects affect the company. There are also now general and climate related standards from the International Sustainability Standards Board, part of the IFRS, which are being looked at and adopted as part of financial regulations around the world which will bring a lot of commonality to required information.
All this push for disclosure is to ensure that all relevant risks are considered by investors, something that hasn’t always been the case, in particular around climate. You’ll remember that “A was for Annual Report”, and this is where most of your disclosure is likely to be, although you may choose to supplement this with a separate sustainability report and further detail, like specific policies, made available on your website. But you also have another place where you can bring this to life for investors, the capital markets day.
A capital markets day usually has the intention to create a better and deeper understanding of parts of the business for investors and many companies will choose to host them at one of the company’s facilities, showing off new manufacturing facilities or innovations. This is a great time to bring your sustainability story to life. Here you will have more chance to talk about opportunities, such as new markets or new and improved products linked to sustainability themes, as well as being able to talk about the steps you are taking to reduce sustainability related risks. Even if you are not presenting to the investors yourself, being on hand to field questions and hear what issues investors are interested in is invaluable. And even if they don’t ask questions, it gives you a chance to educate them on what you are doing and why they should be interested in it. Your investor relations manager should also be someone to get to know as you can help them as well as them helping you!
So, investors are another stakeholder group that you must learn the language off and meet their needs. You’ll need to think of how your sustainability plans contribute to the overall company strategy, how they can bring efficiencies (e.g. waste and energy reduction), cost certainties (e.g. long-term electricity contracts, moving away from raw materials with oil feedstocks with inherent price spikes), new market opportunities or product innovations related to sustainability trends, and risk reduction (e.g. from site and supply chain resilience to increased extreme weather events). If this all sounds difficult, please contact the folks at CEN Group as they have a wealth of experience in both investor relations and sustainability.
About the Author
Chris is a senior strategic leader with over 25 years’ commercial experience including sales, marketing, strategic planning and major business change initiatives at AkzoNobel and ICI. He has a wide knowledge of sustainability and how to integrate this into business having held senior sustainability roles at AkzoNobel for 12 years, including as Global Sustainability Director Decorative Paints and AkzoNobel Planet Possible Programme Manager. Chris is now an independent sustainability consultant and a pension trustee director.
Contact us
CEN helps businesses maximise their sustainability potential, performance, and ESG disclosure.
For more information about our services pertaining board engagement programmes and knowledge building sessions, please get in contact via email and our team would be happy to assist.
Jasper Crone: Director
Roger Johnston: Director
Comments