What investors need to know about corporate impact

Investors are increasingly interested in the sustainability performance of companies they may consider for investment in their portfolios. In 2016, global assets in the category of socially responsible investing – or environmental, social and governance (ESG) investing – hit nearly $23 trillion in Europe, accounting for more than a quarter of total managed assets. In the US, assets under management applying ESG criteria hit nearly $9 trillion at the start of 2016, growing 30% in just two years.

And, the realisation hitting the mainstream is that companies who are thoughtful about their impacts are also likely to also be strong investment opportunities, which is influencing the information more investors want to see.

Organisations with an eye on their ESG impacts now, and what they might look like in the future, are proving to be a safer bet for investors and their clients. “Two decades of experience have shown us that deploying an ESG focus is entirely complementary to long-term performance goals,” says Richard Wilson, CEO of BMO Global Asset Management. Basing a strategy around companies with strong ESG profiles makes sound investment sense, he argues.

Building an understanding of what corporate risk looks like and how ESG impacts can be measured has become a valuable tool for the investment community.

Investors have developed ever-clearer ‘wish lists’ when it comes to corporate disclosure as they determine their portfolio make-up. “We want companies to be clear about what they are in business to do and how they meet the needs of customers, society and their employees in a differentiated way,” says Leon Kamhi, executive director and head of responsibility at Hermes.

By doing this, investors are able to evaluate whether they are likely to develop as a sustainable business over the long term and thereby deliver financed and social and environmental returns for their client. Leon says that real evidence manifests itself with specifics that are relevant and material to a company – for example, a bank and its approach to employee conduct, an extractives company and how it deals with health and safety, a retailer and its supply chain or an FMCG company and its packaging.

Benchmarking and ratings systems, such as CDP, and tools and resources developed by the likes of the Sustainability Accounting Standards Board, are proving to be valuable devices to help investors make more informed decisions. CDP’s Global Water Report tracks corporate disclosure and management on freshwater use, for example. It does the same for carbon footprint disclosure, both for internal operations and in supply chains.

But as the general understanding of corporate sustainability matures, a number of investors are much more interested in how companies show evidence of progress against issues that are materially important and most relevant to their organisation and specific industry.

Hermes is an investor in the development of London’s King’s Cross area and so Kamhi was buoyed by the latest report by Regeneris looking at the social impact of the development. The paper describes the social impact based on job creation, apprentice training, footfall in public spaces, new homes (including affordable housing) and the number of students in university and schools.

“We would like to see what is relevant and material to the company, and the information presented as an integrated part of how they do business, and not as a separate appendix,” he says.

There is also a need for greater transparency and better benchmarking so that ‘good’ companies are sufficiently rewarded with a lower cost of capital when compared with their unsustainable peers. “Yes, we’ve seen more information being provided by companies. But it is time-consuming to read, hard for the inexpert to compare, and often hard to access because it is privately held behind a paywall,” says Marte Borhaug, head of ESG strategic projects at Aviva Investors. She would like to see more publicly available benchmarks so that everyone can see just how well companies are really doing. Aviva is involved in the setting up of the World Benchmarking Alliance, which will produce international league tables that measure and compare corporate performance on the SDGs.

As the global corporate response to the biggest social and environmental challenges gathers pace – and the diversion of funds to stimulate positive outcomes for people, planet and economies becomes increasingly necessary – the communication of impacts to investors to enable them to make the right choice has become crucial.