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Investors Continue to Push for Sustainability Data
January 9, 2017
The incoming administration has suggested it will take a sharp turn away from President Obama’s efforts to reduce greenhouse gas emissions, causing uncertainty regarding the factors that have made energy strategy a top priority among businesses in recent years. For example, recent reports showed that the Securities and Exchange Commission has been increasing pressure on businesses to account for their exposure to climate change-related regulations. If the new administration relieves that kind of regulatory pressure on businesses, will investors follow suit?
However, rather than adjusting their priorities in the face of this transition, investors appear to be doubling down on the financial value of corporate sustainability. Last month, a New York Times article pointed to “socially responsible investing” as a reflection of business trends that are likely to continue unabated. While the US commitment to the Paris Agreement to limit the effects of climate change remains up in the air, the report says that the business trends that created such ubiquitous international support for the agreement are likely here to stay. Specifically, the decline in renewable energy prices and innovations in battery storage are examples of market trends that have helped businesses embrace the efforts to reduce emissions, according to the report. The increasingly favorable economics of renewable energy will also help businesses meet the expectations of an increasingly environmentally minded market, as the number of consumers willing to pay more for products and services from companies demonstrating a commitment to sustainability continues to grow.
Even if the federal government does reverse course on its efforts to demand more transparency into the energy and sustainability strategies of large businesses, it’s entirely possible that investors could fill the void.
“If investors can’t count on regulators to enforce transparency on sustainability, Sonia Kowal, president of Zevin Asset Management, they may take matters into their own hands,” told the New York Times.
In fact, investors worldwide are preparing to do exactly that. According to the UN Conference on Trade and Development, 21 stock exchanges have confirmed they will introduce sustainability reporting guidelines in the coming months; currently, just 17 stock exchanges “recommend” reporting data on environmental, social, and governance (ESG) efforts. And the emerging reporting standards will be based on the Sustainability Stock Exchanges platform, an initiative that currently includes more than 30,000 companies over 60 exchanges, and which will provide model guidance to participating companies.
With more sustainability reporting tools and guidance available to businesses, investors will come to expect access to the data. Of course, this means companies will need to establish an effective method for reporting accurate data reflecting their sustainability efforts - a coordinated, cross-department strategy. But, just as important is ensuring that the data actually drives value for your business. Sustainability means different things for different organizations, and pursuing efforts that are not material to your business could actually have a negative impact over the long term. If your organization’s energy consumption is a significant value driver, for example, investors will want to see what you’re doing to capitalize on it.
Companies that are capable of taking action on their energy consumption are already seeing significant financial benefits. A 2014 study by CDP found that, among corporations on the S&P 500 Index, those that are actively preparing for the effects of climate change saw an 18 percent higher return on equity (ROE) than those that are not, and 67 percent higher ROE than companies that didn’t disclose emissions data at all.
When combined with the many other trends driving change in energy strategy — including the emergence of strict laws and regulations on greenhouse gas emissions and shifts in the market making sustainability more important to long-term branding — the ability to identify and pursue energy and sustainability efforts will become critical to remaining competitive.
It is clear that businesses need a comprehensive strategy to enable them to identify their most valuable energy opportunities, ensure they are capable of capitalizing on them, and equip them to provide accurate data reflecting their efforts. As investors continue to push for this kind of performance data, the ability to show real progress in energy management is quickly becoming a competitive advantage.