Many business leaders find themselves stuck in a plateau on their ascent towards “Mount Sustainability,” unable to scale at the pace required to address global challenges, says the “CEO Study on Sustainability” by the U.N. Global Compact and Accenture. The report is an important read for anyone working in the sustainability profession, and the results show how far corporations have come in their journeys towards sustainability, as well as how far we have to go.
The investment community is certainly part of the system that needs to be changed, and I was particularly struck by the percentage of CEOs who believe they are currently incorporating sustainability issues into discussions with financial analysts (47%) and integrating reporting of financial and sustainability metrics (49%). Based on what I have observed from even the most leading companies, these percentages are considerably inflated. I would be a richer man if I had $1 for every time I heard, “We’d like to engage investors, but we never get any questions from them.”
It’s unfair to place the blame solely on companies for not engaging with investors. We are at a moment when investment time horizons are shorter than ever — by some estimates, the average holding period for equities is six months or less, and high-frequency trading accounts for roughly 50 percent of all shares traded. It can be challenging for companies to make long-term investments given data points such as these.
Yet companies have more power than they think, and they have the ability to shape investor attitudes and behaviors through the language they choose.
In 2012, academics from Harvard Business School found a link between the verbiage that company executives use in earnings calls with the orientation of investors — that is, executives emphasizing the short-term via phrases such as “next quarter” attract investors fixated on quarterly results. This should give us hope that, as the authors explain, short-term tendencies in the market are not insurmountable.
We also should have hope that investors slowly are coming to the “light side,” as SustainAbility board member and former GE Asset Management portfolio manager John Schaetzl is fond of saying. I recently attended a talk by Jeremy Grantham, founder and chief investment strategist for GMO, in which he thoroughly outlined the societal and investment implications of resource scarcity, in particular for phosphorus. As one Wall Street Journal author put it, Grantham’s track record — he foresaw the Internet and housing bubbles — make him hard to ignore.
It is also promising to see the continued growth and evolution of the UN Principles for Responsible Investment (UN PRI), backed by investors managing $34 trillion. On Sept. 30, the UN PRI launched its new reporting framework, which will push signatories to be more transparent about their responsible investment activities or risk being delisted. This is welcome news for companies wondering why investors committed to efforts such as the UN PRI never raise questions about sustainability topics on earnings calls.
A call to bring investors to the light
Recognizing the rising expectations for business to take the lead on shaping a sustainable future, SustainAbility proposed a framework for extended leadership in Changing Tack.
Advocacy — one of six attributes — compels business to mobilize other actors, including investors, to reform structures and systems to scale and accelerate sustainability. We know investors are not pressuring companies today. Only 12 percent of CEOs say they feel such pressure, according to the UNGC/Accenture survey. Yet we also know that only a handful of companies have tried to engage this audience in a meaningful and consistent way.
We need many more companies to think critically about how their sustainability efforts align with core business strategy and activities, and then take this message to investors repeatedly. From SustainAbility’s conversations with analysts and portfolio managers, including through our Rate the Raters research, we know that companies will fail to engage this investor audience unless they identify a concise list of material issues — say, a maximum of five — and deliver a strong narrative for each in terms of business risk and opportunity.
If done well, investors will have a better foundation upon which to ask questions to companies eagerly awaiting them, and, ultimately, to integrate environmental and social considerations into their investment decision making.