Investors Increasingly Care About a Company’s Sustainability Practices

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Sustainability practices are not just about building brand reputation anymore or about responding to consumer demands. Companies that focus on sustainability efforts through sourcing or other supply chain functions can now better attract the attention of business investors.

Recent research has shown investors are attracted to companies that are dedicated to sustainability. A study or more than 7,000 managers and investors around the globe conducted by MIT Sloan Management Review and The Boston Consulting Group showed investors link sustainability performance to a company’s value and use information on a company’s sustainability efforts as a key criterion for making investment decisions. The report also showed that a growing number of investors are paying more attention to an organization’s environmental, social and governance (ESG) metrics, as they have been shown to contribute to a company’s financial success over time.

“Companies have been complaining that nobody cares about sustainability,” Robert Eccles, chairman of Arabesque Partners and professor of management practice at Harvard Business School, said in the report. “But investors care, and companies need to up their game.”

Seventy-five percent of senior executives at investment firms said a company’s good sustainability performance was “materially important when making investment decisions,” according to the survey. Additionally, 75% said the fact that sustainability practices lead to improved revenues and operational efficiencies at companies was a strong reason to invest in the organization. Sixty-percent also said strong sustainability performance reduces company risks and lowers a company’s cost of capital.

Divesting From Companies with Poor Sustainability

Conversely, if a company has a record of poor sustainability performance, 44% of investors said they would not invest in the firm. And, another 60% of investment firm board members said they would divest from a company if it had a poor sustainability footprint.

One industry experiencing investor divestments is the fossil fuel industry. According to the report, more than 400 institutions and 2,000 individual investors have divested more than $2 trillion from fossil fuel companies. Global insurer Allianz is among the names of firms that said it would divest from any company generating more than 30% of revenue from coal mining or that based more than 30% of its energy production on coal.

Growing Importance

Many investors agree sustainability has become a more important in recent years. Ninety-two percent of investors said good sustainability performance mattered to investors more so today than just three years ago. Forty-three percent of that group agreed with that statement to “great extent.”

A main reason why a company’s sustainability performance mattered to investors was that sustainability increased the potential for a company’s long-term value creation. A company’s potential to improve revenue as a result of sustainability efforts, better operational efficiency and compliance with market expectations were also reasons for caring about an organization’s sustainability performance, investors said.

Investors also want to avoid being linked to companies that experience corporate scandals like Volkswagen’s diesel emission scandal, which lead to investor losses of about $33 billion last October, according to the report.

Companies Need to Take Action

It seems many companies are missing out on possible investor opportunities for failing to implement sustainability practices. The MIT and BCG survey showed that the number of companies with a sustainability strategy in place has decreased in recent years. In 2015, 60% said they had a sustainability strategy, down from 68% in 2014 and 62% in 2013. Additionally, only a quarter of respondents said they have a positive business case for sustainability, although 90% see sustainability as important.

MIT and BCG offered recommendations companies can take to ramp up sustainability practices and gain the attention of sustainability focused investors — things such as incorporating sustainability strategy into the overall corporate strategy and to engage investors to discuss any progress the company has made on sustainability. The report also urged those with no sustainability strategy to get on the bandwagon.

“As investor interest in sustainability mounts, sustainability laggards need to pay attention,” the report said.

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