Unrequited Love – Corporate CSR Reports and the Capital Markets (Part I – Understanding the Disconnect)

Sustainability is important to companies but do investors notice or even care?


Martin Grosskopf of AGF addressing the audience at recent TSSS event, “Bay/Wall Street and Sustainability (Feb.5, 2015)

2013 United Nations Global Compact survey of one thousand CEOs representing 27 industries in 103 countries found that 93 percent viewed sustainability performance as important to their company’s future success. How can corporations have their sustainable development work more accurately reflected in their stock valuation? Professionals from sectors as diverse as mining, academia, energy, public relations, sustainability, marketing and finance gathered on Feb. 5, 2015 at the offices of Loyalty One in Toronto to explore answers to this question. (Learn more about the event theme and panel by clicking here)

Do investors understand sustainability?

“Most institutional money managers and analysts don’t really know what sustainability is…

Dr. Blair Feltmate (Associate Professor and Director of Sustainability Practice, University of Waterloo) moderated a panel of experts who offered insight into the disconnect that many companies feel when attempting to communicate the bottom line value of their business activities with corporate investors. Dr. Feltmate explained in his opening remarks, “Most institutional money managers and analysts don’t really know what sustainability is, and most of them haven’t ever opened a Sustainability Report. They are smart people but they just don’t understand our value added messaging; we need to find a way to better communicate with them.”

Getting sustainability on the capital markets radar screen

The panel discussion explored the challenge of bringing sustainable development practices onto the radar screen of mainstream capital markets. Each panelist offered insight from his/her personal experience/perspective, but common themes quickly emerged around ideas of communication, timelines and focus in presentation of ESG data.

It’s all in the right number

While sustainability professionals have embraced tools like GRI, this approach falls short of presenting the clear business case needed to sway the C suite.

Julie Desjardins (President at Desjardins & Associates Consulting Inc., Co-author of Environmental, Social and Governance (ESG) Issues in Institutional Investor Decision Making) explained that most Sustainability/ESG (Environment Social Governance) Reports do not draw a clear enough financial connection between sustainability and (1) value creation and (2) risk reduction.  As she explained, producing such a report requires a deep understanding of business accounting that can be used to draw a clear picture of the financial impact of sustainability.  While sustainability professionals have embraced the mantra of “what gets measured gets managed”, and tools like GRI (Global Reporting Initiative) have been adopted to provide valuable data, this approach is piecemeal and falls short of presenting the clear business case needed to sway the C suite.  Compounding the challenge, Desjardins explained, are the problems of (1) “short-termism” (pressure on management for short term returns that dissuades from investment in sustainability and (2) C-suite compensation rarely being directly linked to sustainability performance.

It’s about the right messaging

Ian McPherson (Chair of the Investment Committee of the United Church of Canada, Founder Canada’s 1st Global Clean Energy Fund) suggested that the question, “Can Sustainability Analysis be Integrated into the Canadian Capital Markets?”, is one that reflects a belief that Bay St. does not appreciate sustainability. McPherson stated, “In my opinion, most sustainability advocates underestimate the appreciation of people in financial markets for ESG.” He explained that while many in the financial markets do appreciate ESG, there are a number of reasons why Canadian capital markets do not give sustainability the profile many sustainability advocates desire:

  1. Communication style: There is a disconnect between sustainability advocates and financial professionals when it comes to language and communication.  Terminology is important – for example, the word “speculator” might evoke a negative perception of a gambler for many non-financial people, in financial markets it is a technical term for people who provide a valuable service through price insurance to farmers. In finance, most terms are very well defined, but sustainability has a ‘soft’ definition that lacks the clarity expected by financial professionals.
  2. Information overload: Sustainability advocates have pushed for measurement and statistics and while these are vital, there is now the problem that CSR report information is not helpful in decision making for money managers because what is useful is “buried in a CSR information haystack.”
  3. Mismatched time horizons: Financial services professionals are looking at short timelines and quarterly results while sustainability professionals are looking at LONG timelines (e.g. tough to forecast price/increase/availability of water more than a year in the future, so it becomes a nice to know, rather than a must know)

The TSSS audience sharing ideas with sustainability and investing experts, Ian McPherson, Julie Desjardins, Martin Grosskopf and Blair Feltmate.

It’s about knowing your audience

An investor who only wants to hold the stock for less than a year may not care much about emissions down the road.

Martin Grosskopf (Vice President and Portfolio Manager, Director of Sustainable Investing at AGF) explained that we should be conscious of the significant progress that has been made in this area. He described how when he got into the industry 15 years ago, the term ESG hadn’t even been coined yet, and they struggled to address “ethical issues with investors without getting thrown out of the room!”  Today, there are over $45 trillion in assets signed up to PRI (Principles of Responsible Investment).  This is not to say that there is not still MUCH work to be done in having investment professionals truly understand and embrace the value of sustainability.  Grosskopf emphasized the importance of tailoring information for its intended audience, “There is no one investor, every investor is looking for something different, whether earnings, Cash Flow Return on Investment (CFROI), technical trends… and now we’re adding in ESG. An investor who only wants to hold the stock for less than a year may not care much about emissions down the road. Data must be presented to reflect the message the company wants – much depends on how a company wants to be seen.”

The next stage of communication

All three panelists agreed that sustainability advocates are wise to pursue financial professionals as agents of change because they are smart and influential and that it is now time to move on from information and education to the next stage of tactics with this constituency. One fundamental idea emerged from the panel discussion in terms of an approach for this “next stage”: sector-specific “Top 5 ESG metrics”.

Industry-specific material metrics

A set of sustainability metrics that are influential and most material for a particular sector could be presented as part of a clear evaluation of a company’s performance and potential for risk/reward. The selection of the right metrics would be key and they should be identified collaboratively with industry association involvement then communicated clearly through the Association of Canadian Financial Officers.  The Top 5 ESG Metric information would need to be shared effectively by companies, with a prominent position within their annual report and, as Grosskopf suggested, innovative use of modern technology: “Nobody reads reports anymore…data must be available in an easily accessible package. If you can pull the data up quickly on your smartphone, then the managers have to manage it.”

Finding common ground

With the right information, communicated in the right way, sustainability advocates and financial professionals can understand each other and realize mutual benefit.  And yet, is this enough to drive the real change that is needed to protect our planet and our future?

Learn more in Part Two of “Unrequited Love – Corporate CSR Reports and Bay Street” (Part Two – Bringing government into the relationship)