Why investors are seeking practical wisdom
As increasing amounts of financial capital pour into companies disclosing more on their ESG performance, we asked Fronesys associate Brigitte Herren to discern the drivers behind this investment approach which has, hitherto, been an esoteric fragment of the investor marketplace, but is now decidedly mainstream. The connection between corporate performance and environmental and social governance (ESG) metrics has never been stronger. Multiple academic studies have demonstrated the correlation between ESG results and overall share price performance. Worldwide Assets under Management (AuM) of Sustainable and Responsible Investments (SRI) grew from over $2trn in 2005 to over $20trn in 2014 (Sources: US SIF, Eurosif).
- In Europe AuM grew from $0.2trn in 2005 to over $14trn in 2014, which translates into a staggering annual growth of 188%.
- While yearly growth rates in the US were lower, they were still an impressive 30%; and AuM grew from $2trn in 2005 to over $6trn in 2014.
Despite a growing movement among investors, practical approaches showing how companies include ESG metrics into their decision making and reporting are still meagre. For example, nearly 700 of the 1600 firms that are part of the MSCI World Index, do not disclose key environmental data. What can an individual investor, who sees the connection between ESG and financial performance, do about promoting disclosures? Fronesys is partnering with UK-based Osmosis Investment Management, who focusses on using resource efficiency as key investment criteria, to explore one way of answering that question. Together, we are engaging with companies in the Osmosis portfolio to help them improve their performance through utilising environmental disclosures. The rationale is the following: The role of disclosure in performance The market logic behind disclosures is that transparency ultimately contributes to shareholder value. Even if performance is low, credible improvement targets will positively impact market expectations and subsequently share price development. At the heart of our engagement with Osmosis are two convictions:
- CEOs need to see the financial impact of their decision making. While maximising resource efficiency makes sense for companies and society alike, we believe that CEOs need to see direct financial benefits to take action to improving environmental performance. Osmosis has a convincing methodology to deliver the causal link from environmental to share price performance – helping CEOs to translate a perceived indirect and long-term topic into a short-term operational decision that will improve the company’s bottom line.
- Environmental disclosure can unlock integrated thinking. Fronesys believes that disclosures are not only a sign of good governance, but that they can be a vital enabler of a wider integrated business and value maximisation strategy. In the specific context of the Osmosis investments, water, waste and energy disclosures can be the first of multiple steps to drive optimal market perception and firm value. Key is the understanding of how particular issues – like waste, energy and water – contribute to the overall long-term value creation of the company, and subsequently scaling relevant insights to other organizational areas.
Our engagement process Based on our understanding of the overall relevance of disclosures, we designed an engagement process that provides tangible insights and benefits, instead of simply putting investor pressure on a particular company. We enter into a dialogue with non-disclosing and environmentally poor performing companies, to understand their current position, and discuss ways forward that will benefit the firm. The ultimate goal is not only to assure the disclosure of water, energy and waste metrics, but to help companies leverage non-financial metrics to improving performance, and to help them scale value- based learnings to their entire strategy, execution and reporting process. The best thing is that investors can have their cake and eat it too – they can get better returns while seeing their capital drive better disclosures and better performance in the companies they invest in.
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Jyoti Banerjee, partner at Fronesys, highlights that by adopting the principles of integrated thinking and reporting, universities can move away from a focus on reporting short term financial metrics to a multi-stakeholder approach which offers compelling narratives about their value.