'Epic Battle' Pits Investors Against What’s Important

19 Dec 2012Michael Sadowski

Here’s the crux of the sustainability dilemma: What researchers and nonprofits deem “important” to the long-term health of companies doesn’t coincide with information that investors consider “material.” That’s how one investment professional described the current “epic battle” to our company, SustainAbility, in an interview for the latest edition of our “Rate the Raters” research, The Investor View.

There’s a wide gap between what investors say is important and what they do with their money. For example, more than 1,000 investors, managing more than $30 trillion in assets, have signed on to the United Nations’ Principles for Responsible Investment. Yet a recent study by US SIF reports that just 11 percent of all investments under professional management in the U.S. qualify as “sustainable.” The number is growing, but 89 percent of U.S. investors are making decisions based mainly on more narrow, traditional considerations.

SustainAbility set out to better understand the perspectives of the “89 percent” on environmental, social and corporate-governance issues (called just ESG in professional shorthand). Through a survey and one-on-one interviews, we sought the views of investors who don’t specifically focus on socially responsible investment, believing that if we are to make progress addressing climate change, poverty and health, sustainability professionals must work harder to make themselves useful to all investors. (The research was conducted with survey support from Bloomberg LP, parent company of Bloomberg News.)

We surveyed more than 1,000 investment professionals globally in September 2012. The full results of the survey can be found here. A few headlines:

People Trump Environment: When asked if or how they weigh ESG performance in investment decisions, 59 percent of our respondents consider governance often or always, followed by social issues (40 percent) and the environment (34 percent). It surprised us somewhat that social concerns trumped environmental ones; less so when we considered the issues in question. When asked to evaluate select social issues, two topics that get relatively little attention in corporate sustainability reports but are central to business success – customer relationship management (74 percent) and employee training and development (68 percent) — topped the list. More traditional social issues such as diversity (49 percent) and philanthropy (30 percent) scored lower.

Climate Change Doesn’t Move Money: Only 42 percent of respondents said that climate change is important or very important in their analysis of companies, a surprise perhaps, given the increasingly dire scientific projections. We surmise that this result has more to do with investor time horizons than their understanding of climate change – the impacts of climate change to most companies will accrue over years and decades, not quarters.

The Conversation Is Expanding: Over 60 percent of respondents say they are using ESG data and information more today than they were three years ago, while 63 percent say they will use such data and information more three years from today.

Issues that investors do focus on, such as energy or health, are hard to quantify, or even define without a policy framework or standard metrics from companies and ESG analysts. Investors are doing much of this thematic research on their own. They find third-party research lacks depth and specificity.

The key to making sustainable investing more widespread is also the most difficult challenge: Changing the time horizons and public policy framework that investment managers operate in. Investors operate within a system that increasingly rewards short-term performance, and the risks and opportunities from ESG issues often fall well beyond their time horizon. One interviewee bemoaned the massive societal costs imposed by the obesity epidemic, yet because these costs are not internalized by companies, it will remain difficult for publicly-traded food companies to advance their nutrition efforts with the speed we believe is needed.

A good starting place came up in other interviews. If companies want to reach investors on ESG, it won’t be through developing a clever new concept or term, but rather by connecting ESG issues to the fundamentals that matter most to investors. Kill the jargon and speak to investors in their own language.

This article originally appeared on Bloomberg‘s website.

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