Many C-level executives believe in the old wisdom that mainstream investors would not care too much about the ESG performance of their company – the risks and opportunities related to the environment, social issues and good governance. Consequently, there are few companies that invest enough in investor relevant communication on how they lead, set relevant goals, assess the risks and create value from ESG.
A growing share of investment capital is in the possession of asset owners that consider ESG performance as material for the long-term financial success of companies. Investors care more about responsibility than the executives think: according to a recent study1) 75 % of the management in investment organizations consider good ESG performance very important for making investment decisions. In contrast, only 60 % of the executives in listed companies believe that the ESG performance would be significant for investors in their decision-making.
The understanding of investors’ preferences guides company management on choice of direction for the strategy and operations. How to respond to investors’ expectations related to ESG? Below are three leaps that will take you forward.
The first leap: Understand the demand
It is difficult to respond to those expectations that we are not aware of. That is why we need to understand and clarify them. What kind of responsibility commitments have our owners, investors and financiers made? What do they exclude from their investment portfolios and what do they favor, maybe even over-allocate? What are the ESG performance metrics that they consider essential in our sector in terms of return-risk ratio?
The second leap: Develop the supply
The next step is to understand through which vehicles and routes investments are made in our company, and what our strengths and weaknesses are as an investment object. Are the ESG factors part of our value creation story and are we able to show that we manage our ESG risks? Are our shares included in sustainability indices and listings and which of them should we target for being included? For whom are we too small, in the wrong sector, or have too little liquidity?
The third leap: Make communications strategic
Reaching out to the right targets with effective communication enables success in the third leap. Whom exactly do we want to reach out to and are we on the radar of responsible investors and ESG labelled funds? Do we speak the same language on ESG as the investors, and do we provide information that both facilitates the decision-making of investors and reduces the costs of capital?
Responsible investment is becoming mainstream
About 60 000 billion euros are held by institutional investors and asset managers who have signed the UN Principles for Responsible Investment. This capital is increasingly seeking investment objects that fulfill the ESG expectations of its owner – in all asset classes.
The consequence of this development is, that a part of the traditional investment universe will get less euros, leaving them even without capital. This means that some investment objects will be favored by investors while others will undergo a more intense scrutiny on whether they fulfill required ESG criteria.
Thus, there will be a higher demand for the shares and bonds of those companies whose ESG-performance is good. Meanwhile, new ESG investment vehicles are appearing in the market in order to meet the demand.Where in the investment universe do you want your company’s shares and corporate bonds to be? Have you already tried the three-leap tactics?
Author: Tomas Otterström, Advisory Partner leading the Responsible Investment and Sustainability Services at KPMG in Sweden and Finland
1) Investing For a Sustainable Future, MIT Sloan Management Review, May 2016
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