Are we entering a phase of responsible investment?

The latest shifts in the corporate sustainability agenda are coming from a powerful source – and one that was virtually absent from the scene just some years back. From changes in the nature of corporate communication on sustainability and the push to integrate sustainability into stock exchanges to the groundswell of social enterprises, mainstream investors have become one of the most important drivers of change in shaping how companies communicate and interact with their stakeholders.

Communicating Corporate Sustainability Leadership

Businesses around the world are increasingly expected to communicate their impact on society and the environment, and on the strategies and policies they have in place to continuously improve their sustainability performance. But shifting trends – from increased social media use and contradictory movements toward integrated reporting versus specialized reporting on issues such as water and climate – have created new levels of complexity for companies trying to make sense of a fragmented reporting paradigm.

To coincide with these factors, a dramatic move is underway by investors to increasingly integrate environmental, social and governance (ESG) factors into the investment process. This is perhaps best reflected in the UN-backed Principles for Responsible Investment (PRI) – which now claims over 1,000 signatories managing $35 trillion in assets.

The interest in ESG reporting and its link to financials that we see bubbling up from investors presents many intellectual and management challenges – but is a good problem to have, to be sure. It reflects the belief that proper management of sustainability issues can improve corporate performance – and hence investment performance.

Responding to these shifting tides, Global Compact LEAD, our platform for advanced corporate principles for responsible investmentsustainability practices, recently convened a symposium for companies and the major global reporting initiatives to forge a path forward for streamlining sustainability reporting.

Symposium discussions revealed the common belief that, in the age of information and transparency, companies will never report less or disclose less than they do now.  Indeed, the market is shifting from the goal of one consolidated report to different formats for reporting, in which each company can decide which pieces of information are relevant for its unique purposes.

Companies may still seek to limit their ever-growing portfolios of corporate reports, but in order to do so they must first answer two critical questions: why do you report, and for whom? As these questions are not easily answered and the variation among reporting frameworks does not appear to be going away soon, it was advised to seek out areas of complementarity rather than to overharmonize too quickly.

The Global Compact, for its part, is committed to ongoing collaboration with the major reporting institutions globally. We will continue to digest feedback from participants in order to inform our own COP Policy for companies ranging from the beginner to advanced levels. And we will aim to provide LEAD companies with the opportunity to feed into the Integrated Reporting framework – so that all voices are heard in shaping the future reporting ecosystem.

From Investor Briefings to Investing with Impact

To amplify efforts such as the Sustainable Stock Exchanges (SSE) initiative, which promotes sustainable investment in financial markets around the globe, the UN Global Compact and PRI launched the ESG Investor Briefing Series. The series aims to improve company-investor communications on how ESG factors drive value within a company, marking a major shift in communications between companies and investors.

impact investing and sustainability

Companies can now present ESG value drivers that are material for their business to an audience of global investors. With 10 to 15 total briefings in the pipeline, a key goal is to integrate ESG indicators into mainstream financial communications (such as quarterly financial calls), showcasing how sustainability information is linked to companies’ underlying strategies. The first two briefings, hosted by SAP AG and Enel S.p.A, garnered participation by 30 investors, including asset owners, investment managers, service providers and investment banks.

CFOs Engaging Directly In Sustainability

The other purpose of the series is to break down silos that often exist within companies, such as those between investor relations (IR) and CSR departments. The briefing requires both IR and CSR representatives to collaborate on the presentation and to take part in the call itself. Chief financial officers are also requested to participate, as Enel’s did.

This echoes a new Deloitte study, Sustainability: CFOs are coming to the table, based on interviews of 250 CFOs in 15 industries across five continents, which found that:

Forty-nine percent of financial officers believe there is a strong link between sustainability and financial performance.

The study also shows that CFOs are increasingly engaging directly in sustainability – making it “integral to how their businesses run”. It is not surprising then that Deloitte also found that sustainability issues have had an impact on financial reporting and tax issues.

Investing In Social Enterprise

Another exciting and related development is the growing momentum of social enterprises, that is, for-profit enterprises — often start-ups — that also have an explicit environmental and/or social mission. Many in the investment community see these and other “impact investment” opportunities as an emerging asset class.

Indeed, a growing set of investors – development finance institutions, foundations, private wealth managers, commercial banks, pension funds, boutique funds and companies – is seeking to capitalize on the financial opportunities within the social business sector while at the same time delivering wider societal benefits.

JPMorgan recently estimated the impact investment market as offering the potential for invested capital of $400 billion to $1 trillion, and profit of $183 billion to $667 billion over the next 10 years, and investors are taking notice.

The Global Compact embarked on a project with the Rockefeller Foundation earlier this year to launch a new “Framework for Action” to assist participating Global Compact companies and investors in the PRI to better understand the growing opportunities in these domains. Similarly, PRI has launched a special impact investments working group as part of an effort to broaden the initiative’s asset-class coverage.

Mainstream capital markets continue to break new ground in retooling their investment strategies and models. As investors and analysts now commonly expect insights into the sustainability of companies that, over time, may significantly impact profitability and financial value, the companies that proactively manage ESG issues will be better placed vis-à-vis their competitors to generate long-term tangible and intangible results.

Moreover, such efforts connect companies and investors to the broader global sustainable development movement – helping to ensure that all stakeholders deliver solutions to the challenges our world will face in the “Post-2015 Era”.

This article was originally published on CSRwire
Gavin Power
is the Deputy Director of the United Nations Global Compact, the world’s largest voluntary corporate sustainability initiative.