2018 Brings Growing Gap in ESG Reporting vs Investor Demands

Over the past 12 months, the rate by which institutional investment firms are requesting ESG related data from existing and prospective investees has intensified. One such survey crossing the desks of many Investor Relations, and Public Affairs directors of Dow Jones, NASDAQ, and FTSE listed entities is the Morgan Stanley (MSCI) survey. Of course other firms such as BlackRock, Vanguard Group and other prominent signatories to the UN-PRI are surveying their existing and prospective targets but aside from the CDP, very few are as recognisable as the MSCI.

New research released by Morgan Stanley from their surveys to date, declares that companies are still not doing enough to meet investor needs for Environmental, Social and Governance (ESG) data[i].

Over the past 20 years, ESG investing has gone from strength to strength, now commanding 26% of the global market share[ii]. Enshrined institutions including Moody’s, Bloomberg and Ernst&Young have all proclaimed the importance of communicating your sustainability story to the outside world. In hopes of satisfying investor demands, we have also seen these institutions launch sustainability valuation tools such as Bloomberg’s ESG<GO>. These developments have triggered a shift in control over which information is widely accessible, suggesting that sustainability reporting will no longer be a choice for many organisations. More and more, companies will have to take ownership of their sustainability strategy or be owned by downgrades due to poor ESG performance or lack of transparency.

Investors are speaking out now more than ever about their desire for ESG indicators, with an overwhelming 75% of firms surveyed by MIT confirming that sustainability is a key consideration in fund allocating. Despite this, only 20% of Investor Relations Directors recognise the importance of having readily available and presentable sustainability data to discuss with shareholders2. Investor relations are the company’s gateway to the marketplace but failing to respond to changing needs could have significant impacts, particularly as 60% of investors surveyed said they intentionally divest from companies with low ESG ratings.

Leading investors are now using quality ESG strategies as an indicator of a company’s preparedness to manage long-term valuations in the face of new risks and intense consumer and regulatory demands.  Navigating the operating climate has undoubtedly become more complex, but those who have created opportunities to embrace the transition towards sustainability have been rewarded, according to the CSE who recently linked profit growth to pro-active ESG improvements.[iii]

There is a clear competitive advantage to be won by Investor Relations that collaborate with sustainability departments to determine differentiated investor talking points. This combination of expertise will be key to creating a shared language, ensuring IR leadership can convey ESG progress to the market with ease and impact. Stakeholders have already begun to band together to tackle this need-gap and help IR leadership target the crucial information investors want.  They recommend that outlining these four core focus areas of your sustainability story will satisfy any investors’ concerns[iv]:

1. Corporate Governance
2. Strategy
3. Risk Management
4. Metrics and Targets

With young, socially conscious generations entering the market all the time, ESG investing shows no signs of slowing, meaning conditions could now be ripe for achieving integrated sustainability strategies.

References: 

[i] Morgan Stanley Institute for Sustainable Investing, “Communicating ESG to the 21^st Century Investor”, Oct 2017, Available at: www.morganstanley.com/sustainableinvesting

[ii] G. Unruh, D. Kiron, N. Kruschwitz, M. Reeves, H. Rubel, and A.M. zum Felde, “Investing For a Sustainable Future,” MIT Sloan Management Review, May 2016.

[iii] Centre for Sustainability and Excellence, “Sustainability Reporting Trends in North America 2017”, August 2017. Available at: //sustainability-academy.org/eight-8-surprising-trends-sustainability-reporting/

[iv] Task Force on Climate-related Financial Disclosures, “Recommendations of the Task Force on Climate-related Financial Disclosures”, June 2017. Available at: //fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Report-062817.pdf