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Investors Care More About Sustainability Than Many Executives Believe
May 19, 2016
Understanding investor priorities is an important responsibility for a company’s top executives and its board of directors, yet, new findings show that managers’ perceptions of investors are out of date.
A 2015 survey of more than 3,000 managers and investors in organizations from over 100 countries conducted by MIT Sloan Management Review and The Boston Consulting Group (BCG) found that investors increasingly believe that sustainability performance creates tangible value and are prepared to divest from companies with a poor sustainability footprint.
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The results are captured in a new report, Investing For a Sustainable Future, co-authored by Gregory Unruh, David Kiron, Nina Kruschwitz, Martin Reeves, Holger Rubel, and Alexander Meyer zum Felde. The authors suggest that executives are wrong to buy into the conventional wisdom that mainstream investors care little about an organization’s environmental, social and governance (ESG) performance, and back up the assertion with in-depth analysis. In turn, they also identify what corporate leaders can do to stay relevant to sustainability-oriented investors.
Some of their key findings include:
- Managers’ perception of investors is inaccurate: Only 60 percent of managers in publicly-traded companies believe that good sustainability performance is materially important to investors’ investment decisions, while 75 percent of senior executives in investment firms believe that good sustainability performance is materially important when making investment decisions.
- Investors believe that sustainability creates tangible value: 75 percent of investors cite improved revenue performance and operational efficiency as strong reasons to invest in a company with good sustainability performance, while more than 60 percent believe that it reduces a company’s risks and over half believe it lowers the cost of capital.
- Investors are prepared to divest: Roughly 60 percent of investment firm board members say they are willing to divest from companies with a poor sustainability footprint, while nearly half of investors say they will not invest in a company with a record of poor sustainability performance.
- Lack of communication within corporations and investment firms and between them: In corporations, nearly 80 percent of board members and 85 percent of C-suite executives are fully informed about their organization’s sustainability efforts, while only 51 percent of senior managers and 31 percent of middle managers and front-line employees are equally well informed. At investment firms, only 62 percent of front-line employees and 73 percent of middle managers believe their companies engage in responsible investing despite that more than 80 percent of board members believe the same. Investor respondents estimated that sustainability issues arise in just 54 percent of earnings calls and shareholder meetings they attend.
- Sustainability indices are losing their appeal: Only 36 percent of investors said that being included on a major sustainability index is an important factor in their investment decisions. Just 32 percent of managers in public companies said their business is listed on an index, and only 44 percent of them believe such honors are important.
- Few companies have developed a sustainability strategy, despite considering them important: Nearly 90 percent of respondents said that a sustainability strategy is essential to remaining competitive, but only 60 percent of corporations have such a strategy. Only 25 percent of respondents said that their companies have developed a clear business case for sustainability.
The shift in investor attitudes seemed unlikely even 7 years ago. In 2009, Bloomberg researchers found that just 22 percent of the 766 CEOs they surveyed from around the globe believed investors would be key stakeholders in driving their action on sustainability over the next five years. And while the MIT Sloan Management Review authors assert that this perception “has passed its sell-by date,” they also acknowledge that sustainability metrics have only recently become so important to investors. Their 2015 survey showed that 74 percent of all investor respondents believe that sustainability performance matters more than it did 3 years ago.
The authors suggest that investor interest in sustainability is being driven by at least three factors:
- The growth of analytics and sophisticated modeling that shows how and when sustainability investments create shareholder value;
- Research from academic institutions and investment firms that links effective management of material sustainability issues to strong financial performance; and
- A shift in attitude within the investor community about the connection between strong sustainability performance, value creation, and risk reduction.
“Companies have been complaining that nobody cares about sustainability,” commented Robert Eccles, chairman of Arabesque Partners and professor of management practice at Harvard Business School. “But investors care, and companies need to up their game.”