Crack the Code to Sustainable Investing

October 30, 2019 Anson Chang

The New Era of Investment is Sustainable

By Anson Chang, Sustainability Associate, Schneider Electric Energy & Sustainability Services

Today's investment community is riding a wave of newfound interest in sustainable investing. Environmental, social and governance are the three primary metrics that investment firms look at when taking a sustainable approach to investment goals. And the numbers are telling about the benefits of a sustainable investment strategy – both from an investor and company perspective.

To better understand this opportunity, consider this: BlackRock estimated there will be over $1.5 trillion in sustainable investment over the next decade. This huge flow of money into sustainable funds can be attributed to two major factors that make ESG investing increasingly popular – even mainstream:

Sustainable companies outperform peers

According to research from BlackRock: “Companies in the top quintile of MSCI’s ESG scores outperformed since 2007. The first quintile (top 20%) outperformed consistently, while results for the remaining quintiles were more dispersed. Companies that didn’t report ESG metrics were reliable laggards. Top ESG scorers led the pack.” Over the past two decades, ESG reporting companies showed better performance from a stock perspective, risk management perspective, consumer and peers’ perception and overall management of the company. If investors see companies with a better score, it’s a good sign that it’s the right choice for their investment.   

Investments in ESG-reporting companies have a positive impact on the world

The true value of a company does not solely rest on financial performance. ESG metrics fill the gap between financial performance and to reflect the actual impact of a company. Instead of investing for the sake of investing, ESG investments provide benefits two-fold: a chance to have a good impact on the world, and to realize financial benefits.

 

3 Steps to Thrive in the New Era of Sustainable Investing

ESG Disclosure is a three-step, structured approach:

1. Perform a materiality assessment

The first step of disclosing ESG is to know what to disclose. There are many topics in the ESG world, ranging from climate change to energy use, human rights to business ethics. Some might be material to a company and some might be irrelevant.

A materiality assessment is the backbone of ESG reporting. It identifies the most material issues to a company and determines what needs to be reported. It is an exercise in stakeholder engagement (both internal and external) to gather insight on the relative importance of various ESG issues.

On day-one of your company’s materiality assessment, bring in the C-suite and other key stakeholders (i.e. finance, risk managers, procurement, operations & facilities and sustainability specialists) for a focused discussion to pin down important topics and develop a matrix (like the below). This list of topics becomes very useful in the next step – building and deploying a survey to a broader group of stakeholders.

2. Conduct surveys and data collection

The next step in ESG reporting is engaging with a broader group of stakeholders in the organization (i.e. the broader finance, risk, procurement, facilities, etc. teams) through conducting in-person interviews or electronic surveys (like the example below). Once topics to disclose are determined in step one, it comes down to formulating answers based off data within the company. Performing data availability and granularity studies narrow down the gaps in collecting accurate and decision-useful data.

3. Select appropriate frameworks

Choosing the right framework to report to is the last key for successful ESG disclosure. There are three things to consider when deciding on an appropriate framework:

  • Whether the emphasis of the framework matches the material topics identified as important to the company;
  • Whether there is a request from a customer or investor to disclose to a specific framework;
  • Whether it is mandatory to report to a framework.

If there are one or more frameworks that meet the above criteria, these are likely the appropriate frameworks to report to.

3rd generation disclosure: Differentiating yourself from competitors through ESG disclosure

There is an increasing amount of companies trying to disclose their ESG metrics, but mainly in the 1st and 2nd generations so far, described in the below graphic. As a result, there is limited connection within ESG reporting to strategic assessment and corporate engagement needed to achieve the 3rd generation of disclosure, where companies are now asked to embed climate risk and resilience into its strategy to demonstrate its commitment to ESG metrics.

We recommend three strategies to build a quality disclosure, which will help your company reach 3rd generation disclosure, with climate risk embedded in corporate financial and operational planning.

Strategy #1: Integrate sustainability into business systems and decision-making

  • Demonstrate accountability for sustainability
  • Develop the sustainability business case
  • Cultivate collaboration between sustainability, investor relations, and governance teams

Strategy #2: Identify what to disclose and where to disclose it

  • Focus investor-directed disclosures on what is material, but don’t ignore emerging trends
  • Disclose decision-useful information, both quantitatively and qualitatively
  • Disclosure sustainability information consistently where investors are already looking

Strategy #3: Implement a proactive investor engagement strategy

  • Use language investors understand and value
  • Leverage the C-suite and board of directors as key messengers
  • Diversify investor engagement strategies

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Whether your company is just starting to disclose or is on the path to becoming an industry leader in ESG reporting, there are always multiple challenges and avenues to improve. Learn more about how your company can prepare for the growing ESG opportunity: watch the recording of this webinar, The Secret Code: ESG Changes Investors' Opinions, featuring Nathan Shuler, Sustainability Solutions Architect at Schneider Electric Energy & Sustainability Services, presented to the EDF Climate Corps.

 

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