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ESG meets Investor Relations: demonstrating the business value of sustainability

ESG meets Investor Relations: demonstrating the business value of sustainability

26-02-2019 | Article

Research is increasingly showing that companies which do not integrate environmental, social and governance (ESG) factors into their business strategy put their long-term competitiveness at risk. Furthermore, those that do not proactively communicate their sustainability strategy and performance are missing an opportunity to attract long-term investors. The annual SAM Corporate Sustainability Assessment (CSA) offers companies a toolkit for more effective ESG integration into their corporate strategy and better investor engagement.

  • Robert  Dornau
    Robert
    Dornau
    Director, Senior Manager, ESG Benchmarking
  • Mainstream investors are showing a growing interest in long-term investment opportunities and ESG integration
  • The CSA enables companies to capitalize on their sustainability efforts through proactive communication of the linkages between ESG and financial performance
  • Investor Relations (IR) professionals can use the CSA to tailor their communication to the issues that matter most to investors

Investors are increasingly looking to incorporate ESG information into their investment decisions and engage dedicated ESG professionals to assess companies’ sustainability performance. This is reflected in the continuous growth of financial institutions that are committed to the United Nation’s Principles for Responsible Investment (PRI), which has now reached more than 2,200 signatories. As a result the demand for sustainability information continues to increase and the way in which companies respond to the ESG expectations of their investors has growing implications for their cost of capital and overall attractiveness to investors. More than ever, it is critical for companies to engage with investors on ESG, and to shape their ESG messages accordingly.

“We consider the CSA to be the premier external sustainability assessment. To keep our sustainability strategy relevant into the future, Praxair can’t simply look into the mirror. We need a way to be able to look into the future. The RobecoSAM assessment is one of our key tools to do that.”
Riva Krut, VP and Chief Sustainability Officer at Linde plc, USA

Better internal collaboration for better external messaging

Explaining the benefits of a company’s sustainability business strategy to investors can, however, be a challenge. It requires close collaboration between companies’ IR and ESG professionals, as well as the involvement of other departments such as HR, Communications or Procurement, to identify and effectively communicate business cases relevant for investors.

The CSA can serve as a toolkit to guide that discussion. It focuses on both tangible and intangible material sustainability factors that could impact companies‘ value drivers, competitive position, and thus long-term shareholder value creation. It also asks questions that “force” companies to identify and explain the link between ESG and their key value drivers of growth, risk and cost. As such, it helps companies to measure and prove the business value of sustainability – and explain it in a language that investors understand, whether through presentations and roadshows, quarterly earnings calls or responses to specific investor inquiries.

“We get high appreciation from investors and corporate customers [for our CSA results].”
Silke-Stephanie Thomas, Deutsche Telekom AG, Germany

Participation in the CSA has already helped ESG, IR and other departments in industries as diverse as banking, mining, and consumer goods to collaborate more closely in putting their company’s ESG performance into context, explaining how challenges are addressed and how the company intends to create value in the long term. The comprehensive scope of the CSA that covers financially material sustainability topics encourages cooperation and exchange across nearly all parts of a company’s business.

Focus on ESG issues that matter to investors

Rather than asking companies for ESG information, most investors still rely on third-party rating agencies to analyze companies’ ESG disclosures. The CSA, since its launch in 1999, has evolved as an assessment designed to help companies to understand ESG from an investor perspective and to directly communicate their ESG efforts and performance, while at the same time providing added credibility by benchmarking the company’s performance against its peers.

Different investors have different priorities. The CSA enables IR professionals to tailor their IR narratives to the issues that investors care about most.

A credible external assessment

“The SAM Corporate Sustainability Assessment helps 3M to answer questions from investor and stakeholders; contributing to our commitment to purpose-driven business.
Tina Berg, Sustainability Mananger, Global Sustainability, 3M co, USA

The CSA is a credible external assessment of where a company stands in terms of its sustainability efforts and performance, and allows it to identify gaps and to close them. In addition, CSA participation enables companies to benchmark their sustainability performance against that of their competitors and communicate outstanding results in a sector comparison, supporting the IR narrative with statements like “we rank among the top 10% in our industry with this approach.”

SAM publishes selected CSA results on all assessed companies − such as company percentile rankings at the criterion, dimension and total score levels – on the Bloomberg Professional platform and total scores in the SAM Sustainability Yearbook. This allows companies to showcase their sustainability performance to the global investment community giving more than 12,000 Bloomberg licensees and over 50,000 visitors to the Sustainability Yearbook website the tools to compare, analyze and identify sustainability leaders, enabling them to integrate relevant sustainability information into their decisions as investors, customers or (future) employees.

Staying ahead of the curve

The breadth and depth of the assessment across the economic, environment and social dimensions gives companies a unique opportunity to highlight their sustainability strengths in areas that might not be covered by traditional sustainability reports. And, for the past 20 years, the CSA has addressed sustainability issues before they have entered the agenda of other investors or regulators. As a result, active participation in the CSA has helped many companies to future-proof their business and stand out as ESG leaders. 

Criteria are typically introduced in the CSA starting with more general questions to assess a company’s understanding of risks and opportunities in that area. In subsequent annual assessments the questions extend to help companies make the link between the sustainability issue and their own business case. They are required to show, for example, which KPIs they set, which metrics and targets are used to track them, and the progress against those targets. This enables companies to make a convincing case for the link between ESG issues and their business strategy, based on real company data. 

“The SAM assessment is both our yardstick to measure how we ARE doing, and our lighthouse to know how we SHOULD BE. It helps us review, introspect and implement a strategy that impacts positively and creates a sustainable value for all our stakeholders”
Sandeep Chandna, Chief Sustainability Officer, Tech Mahindra, India

Key sustainability topics that the CSA introduced before they were the focus of mainstream ESG investors include: human capital development, human rights, climate strategy, and tax transparency. The human capital development criterion entered the CSA in 2002, 15 years before 25 asset owners with total assets under management of USD 2.8 trillion established the Human Capital Management Coalition.  Human rights, the top ESG criterion for money managers representing USD 2.2 trillion in 2018 (source: www.ussif.org), has featured in the CSA since 2002. The climate strategy criterion was introduced in 2013, four years before the Task Force on Climate-related Financial Disclosures (TCFD) set out its recommendations for helping businesses disclose climate-related financial information. In 2014, the tax transparency criterion was introduced into the CSA followed four years later by the UNPRI launching new guidance for investors to assist them with engaging the companies in their portfolios on greater tax disclosure.

Staying ahead of the ESG curve will remain crucial for companies, given the continuing increase in ESG investing, which already amounts to an estimated figure over USD 20 trillion in assets under management equal to approximately one quarter of all professionally managed assets globally. These investments are targeted at companies that effectively address key sustainability challenges and are also succeeding in conveying their ability to exploit the opportunities and mitigate the risks associated with these challenges to improve their profitability, risk profile, and growth prospects.

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