The Sustainability Business Case: Changing the Conversation between Companies and Investors

Companies and investors are increasingly engaging on sustainability. The recent moves on climate issues made by Royal Dutch Shell, Glencore, and BP show how investor pressure (and in particular the Climate Action 100+ investor group) is helping shape corporate behavior. Last month, for the first time in its 30-year history, the nonprofit sustainability organization Ceres brought together members of its investor and company networks for a joint meeting to discuss how to improve collaboration on the role capital markets can play in addressing sustainability issues including climate change, workplace equality, and more.

Inherent Group founder Tony Davis, who is a member of the Ceres board of directors, attended the gathering, which kicked off Ceres’ annual conference in San Francisco of more than 600 investors, corporate executives, and policymakers. He participated in a panel discussion on Ceres’ recently published report, Change the Conversation: Redefining How companies Engage Investors on Sustainability.

In addition to Davis, Rakhi Kumar from State Street Global Advisors and Michael Kobori from Levi Strauss & Co. also participated on the panel. The discussion centered on how businesses and investors can work together to improve environmental, social and governance (ESG) disclosure and performance, including the importance of showing how sustainability issues are integral to a business. Among other imperatives, these efforts require board and C-suite ownership of the topics, using a rigorous disclosure framework such as the Sustainability Accounting Stands Board (SASB) standards, and regular engagement with investors to understand what issues they prioritize in valuing a company.

While companies are disclosing more ESG information than ever, the data often lacks context and standardization, is unaudited, and goes quickly out of date once published. Furthermore, companies are inundated by survey requests and an alphabet soup of reporting frameworks that creates significant noise in the data. For investors that are focused on ESG issues, like Inherent Group, this poses both a challenge and opportunity for improvement and corporate engagement. Change the Conversation offers three strategic guidelines to help companies make their investor engagement on sustainability more effective, with a focus on business integration, consistent financially material disclosure, and proactive communications.

“At Inherent Group, we encourage portfolio companies to identity the ESG issues and opportunities that are most important to the business, set performance targets, integrate sustainability into operations, and report on progress. We believe that companies that drive ESG through operations have less risky cash flows, which should translate into a lower cost of capital,” said Davis. “Together with investors, company executives can help solve the most pressing issues of our time by using the lever of the capital markets to effect change.”

A number of thought leaders including Ceres are engaging with companies on how to make the sustainability business case to decision-makers in their organizations. On the academic front for example, Professor Tensie Whelan, the Director of NYU’s Stern School of Business’ Center for Sustainable Business, has created a Return on Sustainability Investment (ROSITM) Methodology that draws the link between corporate sustainability initiatives and financial outcomes.

“Connecting these dots for key players like the CFO and operational leaders is critical,” said Davis. “Otherwise, sustainability is marginalized as a communications and marketing exercise rather than a valuable tool that drives business performance and long-term value creation for shareholders and other stakeholders.”