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Sustainability Trend Tracker

By Jeff Zelkowitz, senior director and global financial practice leader, APCO Worldwide

Are businesses and investors at an inflection point?

lobal mega-trends are converging to make sustainability a business issue for major corporations, institutional investors and Wall Street firms. And what matters for performance also matters for communication. Integrated reporting and effective communication about sustainability will increasingly have to focus on materiality, simplicity and comparability for investors. That is the key takeaway from APCO Worldwides recent New York Salon event, Sustainability and Financial Communication. This conversation brought together institutional investors, corporate responsibility officers, financial research executives, corporate communication experts, investor relations professionals and social impact organizations for a dialog on what matters and whats next. APCOs sustainability trend tracker examines the state of play and makes a few predictions. The following are thoughts shared by some of the experts who participated in the conversation, and a summary of the event highlights.

What investors need is a pragmatic, sectorspecific framework for companies to disclose what matters. For example, if a global mining company is investing in a multi-billion dollar project that accounts for a major slice of an emerging countrys GDP, I really care about how they manage their relationship with communities and contribute positively to the economy and society in ways that support their long-term franchise and license to operate. How a company manages ESG issues can be a proxy for management quality or raise red flags for inquiry by analysts. Erika Karp, head of global sector research, UBS Investment Bank; board member, Sustainability Accounting Standards Board (SASB)
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Our approach to providing medicine to under-served populations has shifted. It is no longer solely a philanthropic endeavor; rather, access to medicine and sustainable pricing models are core to our global business and expansion strategy, particularly in emerging markets. This is why we are including data on access issues in our annual report as one of several sustainability KPIs we use to help shareholders and other stakeholders understand and track how we connect business value and social impact. Caroline Roan, vice president, Corporate Responsibility and Reputation, Pfizer Inc.; president, Pfizer Foundation

There are now close to 5,000 companies issuing corporate responsibility reports, and that is great. But that is a lot of information to process, so I am asking companies to make my job easier. The Management Discussion & Analysis section of the SEC 10-K annual report would be the best place for investors to evaluate material ESG issues and consider their impact on the cost of capital and long-term business value. Tell me what you are doing, what your goals are, what the results are and how that makes you more sustainable. Eileen Cohen, managing director, senior client portfolio manager, U.S. equities, and chair of the proxy committee, J.P. Morgan Asset Management

Sustainability issues are increasingly intertwined with the stakeholder landscape and pressures around corporate transactions and strategic change. To gain buy-in and manage risks, companies need to communicate how what they are doing will deliver positive benefits for all their stakeholders, while also building a more durable enterprise and long-term value for shareholders. Jeff Zelkowitz, senior director and global financial practice leader, APCO Worldwide (moderator)

WHAT MATTERS FOR BUSINESSES THE ISSUE  Sustainability has become a business issue. Social trends, environmental risks and public policy have radically altered the operating landscape. Consumers, governments, asset owners and other stakeholders hold companies to new standards and expect them to make a positive social and economic impact. But companies struggle with how to communicate given the wide range of issues, data and stakeholder interests.  Businesses are more aware of sustainability and how they manage environmental, social and governance (ESG)-related issues.  Sustainability is increasingly embedded in operations. There is some movement from corporate responsibility and philanthropy to shared value for business and society, and from responsibility to long-term business sustainability.  There are organizational challenges for aligning business strategy, corporate responsibility and financial reporting, and being consistent to sustainable business values and balancing short-term versus long-term goals.  Corporate responsibility reporting has an increased focus on materiality and fewer, simpler KPIs to communicate about sustainability issues that impact the business.  Boards are asking for more information on sustainability. Stakeholder engagement with pension funds on ESG issues is providing an external feedback loop.  First steps are being taken towards integrated reporting of financial and ESG performance. Challenges include terminology, uniform standards, data collection and materiality of what should be disclosed.

WHAT MATTERS FOR INVESTORS  Investors try to evaluate the long-term value of a business franchise. Sustainability is a consideration due to socioeconomic imperatives for various industries that are causing them to adopt more sustainable strategies. Data history on ESG factors for financial performance are limited, but they can impact a companys cost of capital and valuation.

CURRENT TRENDS

 Mainstream investors are more likely to focus on ESG as a risk factor for cost of capital and long-term, risk-adjusted shareholder returns.  The pay-off from sustainable growth strategies is seen as longer-term and markets tend to focus on shorter-term fundamentals driving earnings and stock prices.  Investors tend to focus most on the governance part of ESG. Experience has shown that demands for corporate governance changes can enhance shareholder value fairly quickly.  More sector analysts are focusing on ESG issues as a potential red flag, as a proxy for management quality or as an opportunity for investment ideas with potential for outperformance. A lack of uniform standards and data limits analysis.  Retail investors interests in investment products and indexes that enable them to align their financial plan and sustainability values is rising fast.  Asset managers see a change in investors demands and a need for thinking longer term, though mainstream institutional integration of sustainability in investment decisions is further along in Europe than the United States.
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WHAT MATTERS FOR BUSINESSES WHATS NEXT?  Convergence of global mega-trends, macro-economic, social and environmental issues creates an inflection point for sustainable business strategies.  The most successful businesses will be the ones that offer solutions, make life better and serve pressing needs of 21st century societies.  Sustainability will increasingly sit with business strategy and planning functions, including product pipeline, global expansion and M&A due diligence.  Executives in business lines and corporate board members who can integrate sustainability and strategy will be required.  How the C-suite manages and drives sustainability becomes a factor in assessing management quality and strategic, long-term focus.  A greater integration of financial and ESG reporting and communication is required, including standardized industry-specific frameworks like SASB, as well as IIRC and potential SEC regulatory disclosure requirements.

WHAT MATTERS FOR INVESTORS  Fundamental macro-economic trends suggest an inflection point for sustainability as an issue for investors. They will need to factor ESG into stock research and use enhanced analytics for ESG and financial performance.  Sector-specific analysis facilitates peer comparisons. SASB industry-specific sustainability accounting standards for disclosure in financial reporting, such as the Form 10-K annual report, will provide concise information for investors.  Financial policymakers, regulators and investors are starting to look for a pragmatic, uniform way to integrate sustainability into financial statements and investor information.  A more robust dialog is required on how companies and C-suite executives communicate their culture and sustainability efforts to investors. This includes the roles and reporting lines of chief sustainability officers and risk officers.  A greater integration of sustainability across equity and fixed income asset classes for leading institutions is needed.

APCOs New York Salon events, part of the APCO Forum series, provide an environment for thought-provoking, small-group interaction on business issues and challenges from a variety of different stakeholder perspectives. The Salon on Sustainability and Financial Communication was held on March 22, 2013, with Jeff Zelkowitz moderating the discussion.

Driving Global Dialogue

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