Many executives embrace the conventional wisdom that mainstream investors care little about an organization’s performance on environmental, social, and governance (ESG) metrics. Few companies make it a priority to communicate their sustainability performance to investors, or even develop a robust story about their sustainability performance. Why should they? Investors won’t shift their investments, the thinking goes, based on a company’s ESG performance. However, a growing number of investors are paying attention to ESG performance, as evidence mounts that sustainability-related activities are material to the financial success of a company over time. Investors care more about sustainability issues than many executives believe.
Understanding investor priorities is an important responsibility for a company’s top executives and its board of directors. Based on their understanding of investor interests, an organization’s leadership will often focus corporate strategy and behavior in one direction rather than another. If executives believe that their investors prioritize short-term profits, they will tend to organize sales, cost management, and research and development activities to maximize such profits rather than make certain long-term investments. With greater numbers of investors making investment decisions based on sustainability performance, it is time for corporate leaders to recognize that an increasing number of shareholders are (literally) invested in whether a company’s ESG activities connect with its financial success. How should corporate leaders respond to this growing interest in sustainability among mainstream investors?
This is an especially important issue for today’s corporate leaders since a wide range of investment organizations — from retail investors to asset managers to institutional investors — are making investment decisions using new assessment tools that connect ESG performance with corporate performance, some designed by investors themselves. Other tools are emerging from a diverse community of tool makers, consulting groups, and multinational organizations. Sustainability-oriented investment funds are also becoming more prevalent and have garnered assets worth trillions of dollars. Investors are beginning to seek out and develop their own stories about corporate ESG performance in lieu of companies connecting their sustainability performance with their financial performance.