“Seek first to understand, then to be understood." These are the words of Stephen Covey, in his book ‘The 7 Habits of Highly Effective People." This rule must be obeyed to optimize the circles of sustainability across an organization - all its functions, and stakeholder groups - to create actions for positive outcomes, illustrated by comparable metrics combined with compelling narrative.
For example, the investment stakeholder group. Investors, who may be insurance companies, pensions or NGOs, seek long-term risk adjusted returns, and there is growing evidence that suggests Environmental Social Governance (ESG) factors manifest themselves as investment risk and opportunities to impart value creation in portfolio companies. ESG is therefore increasingly material to the investment process. Moreover, according to the Global Sustainable Investment Review recently published by the Global Sustainable Investment Alliance (GSIA), as at the end of 2011, the global worth of professionally managed assets that incorporate ESG factors had reached $13.6 trillion and rising.
Indeed, the positive or negative affect of ESG performance can alter the value of an organization. Studies over the last forty years indicate the negative impact on value for low eco-efficiency is larger in magnitude to the positive affect on the high eco-efficiency organization, with the differential between the two, shown to increase over time. Notwithstanding, the performance of a range of sustainable investment portfolios indicates higher returns for investors. Additionally, of the previously mentioned US$13.6 trillion of professionally managed assets that incorporate ESG, the most popular investing strategy is negative / exclusionary, which equates to $8.3 trillion.
Moreover, a recent PwC survey for the Principles of Responsible Investment entitled Integration of ESG & Governance issues in M&A (Mergers & Acquisitions) Transactions, Trade Buyers Survey Results, shows that poor performance on ESG factors are used as a lever to reduce the value of a business by as much as ten percent. It being assumed, excellent ESG governance is accounted for in the selling price. Furthermore, once the demand for ten percent discount is exceeded, the willingness to do the deal may well be removed altogether. This suggests that the sale agreement for a US $200M company could be affected by $20M for poor ESG performance – if the deal goes ahead at all. ($20M is a great deal of money for having not taken sustainability seriously). It must further be noted, according to the PwC / PRI survey, 80% of deals have shown a reduced valuation, or the deal has not gone ahead based on poor ESG factors.
Therefore, for CEOs and CFOs, timely, accurate, validated ESG information is vital, delivered to them in a comparable language, as ESG is increasingly affecting their ability to drive financial value inside their organizations, and in turn seek cost effective funds in a timely manner. In fact, an area of complaint from boards is the lack of ability for sustainability departments to communicate their work at a business and finance level. This may be due, in part, that typically the CSO is too distant from the board, yet it is not beyond the ken of sustainability departments to understand the circles of sustainability across a value chain, as well as investment chain. And, as financial valuation models become more widely available, as companies become more experienced with integrated reporting, ESG will expand from risk and liability issues. This therefore suggests the quality of reporting and disclosure will be evidently seen as a value driver, to improve access to investment, and the removal of a price reduction lever.
To ease this shift, according to the Deloitte 2012 Sustainability Study, 61% of CFOs expect involvement to increase over the next two years, underpinning internal collaboration, internal knowledge transfer and fostering the removal of the silo mentality. And to attain economic strength, ESG factors are going to add a dominant perspective, in not only driving a more regenerative and socially just economy, but also deliver a clear understanding to relevant stakeholders how and why ESG efforts are material and core to business as well as illustrate the value drivers showing ESG efforts at the nexus of financial materiality.
Ultimately, ESG and sustainability performance is becoming inextricably linked to financial value, whether a public or private business, of all sizes. And, in the pursuit of a more sustainable and just world, it is the translation of that vision, delivered in appropriate language to the appropriate stakeholders where currently misunderstanding happens. First understand, before making yourself understood.
Christopher Gleadle is author of Sustainable Growth Through Sustainable Business and founder & CEO of the sustainability performance agency The CMG Consultancy.
