Investing For a Sustainable Future

Investors Care More About Sustainability
than Many Executives Believe

by: Gregory Unruh, David Kiron, Nina Kruschwitz, Martin Reeves, Holger Rubel, and Alexander Meyer zum Felde



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.

About the Authors

Gregory Unruh is the Arison Group Endowed professor at George Mason University in Fairfax, Virginia.

David Kiron is the executive editor of MIT Sloan Management Review’s Big Ideas Initiative. He can be reached at dkiron@mit.edu.

Nina Kruschwitz is a senior editor and senior project manager with MIT Sloan Management Review. She can be contacted at ninakru@mit.edu.

Martin Reeves is a senior partner and managing director in the Boston Consulting Group’s New York office and head of BCG’s Henderson Institute. He can be contacted at reeves.martin@bcg.com.

Holger Rubel is a senior partner and managing director in the Boston Consulting Group’s Frankfurt office and global sustainability lead. He can be contacted at rubel.holger@bcg.com.

Alexander Meyer zum Felde is an expert project leader for sustainability in the Boston Consulting Group’s Hamburg office. He can be contacted at meyerzumfelde.alexander@bcg.com.

Contributors

Knut Haanaes, senior partner and managing director, BCG

Matthew Clark, global marketing director, strategy, BCG

Elena Corrales, lead knowledge analyst, sustainability, BCG

Kati Fuisz-Kehrbach, team manager, knowledge experts sustainability, BCG

Olivier Jaeggi, managing director, ECOFACT

Edward Ruehle, writer

Acknowledgments

Antoni Ballabriga, global head of responsible business, BBVA; David Blood, senior partner, Generation Investment Management; John Buckley, global head, corporate social responsibility, BNY Mellon; Robert Eccles, professor of management, Harvard Business School chairman, Arabesque Partners; Olivier Jaeggi, founder and managing partner, ECOFACT; Patricia Jurewicz, director, Responsible Sourcing Network; Cary Krosinsky, adjunct lecturer, Brown University; Richard Liroff, executive director, Investor Environmental Health Network (IEHN); Chris Pinney, president, The High Meadows Institute; Jeff Senne, corporate responsibility operations leaders, PwC; Dave Stangis, vice president of public affairs and corporate responsibility, Campbell Soup Company; Pamela Styles, principal, Next Level Investor Relations; Sarah Teslik, senior vice president, communications, public affairs and governance, Apache Corporation.

About the Sustainability & Innovation Project

MIT SMR’s Sustainability & Innovation project is an exploration, in partnership with BCG, of how sustainability pressures are transforming the ways we all work, live, and compete. S&I’s research, reporting, and community help managers to better understand the new forces that will affect their organizations, to navigate through the overwhelming mass of information about sustainability, and to fend off the threats and capitalize on the opportunities that sustainability issues present.

About MIT Sloan Management Review

MIT Sloan Management Review leads the discourse among academic researchers, business executives, and other influential thought leaders about advances in management practice that are transforming how people lead and innovate. MIT SMR disseminates new management research and innovative ideas so that thoughtful executives can capitalize on the opportunities generated by rapid organizational, technological, and societal change.

About the Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. BCG is a private company with 85 offices in 48 countries. For more information, please visit www.bcg.com.

To cite this report, please use: G. Unruh, D. Kiron, N. Kruschwitz, M. Reeves, H. Rubel, and A.M. zum Felde, “Investing For a Sustainable Future,” MIT Sloan Management Review, May 2016.

References

1. “Investors Don’t Care About Sustainability ...,” Bloomberg Businessweek November 9, 2010, www.bloomberg.com.

2. G. Serafeim, E. Kaiser, J. Linder, I. Naranjo, K. Nguyen-Taylor, and J. Streur, “The Role of the Corporation in Society: Implications for Investors,” September 2015, www.calvert.com.

3. R.G. Eccles, I. Ioannou, and G. Serafeim, “The Impact of Corporate Sustainability on Organizational Process and Performance,” working paper 12-035, Harvard Business School, Boston, Massachusetts, November 2011, http://hbswk.hbs.edu.

4. G.L. Clark, A. Feiner, and M. Viehs, “From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance,” March 2015, www.arabesque.com.

5. U.S. SIF, “Report on U.S. Sustainable, Responsible, and Impact Investing Trends 2014,” n.d., www.ussif.org.

6. N. Robins, “2016, the Year of Green Finance: The View From London,” January 15, 2016, www.huffingtonpost.com.

7. U.S. SIF, “Report on U.S. Sustainable, Responsible, and Impact Investing Trends 2014.”

8. United Nations Global Compact, “Implement the Value Driver Model,” n.d., www.unglobalcompact.org.

9. “Global Investment Universe,” n.d., www.arabesque.com.

10. “A Quantitative Approach,” April 22, 2015, www.arabesque.com.

11. Arabella Advisors, "Report: Measuring the Growth of the Global Fossil Fuel Divestment and Clean Energy Investment Movement," September 2015, www.arabellaadvisors.com.

12. Ibid.

13. Ibid.

14. Ibid.

15. Associated Press, “Allianz to Cut Investments in Companies Using Coal in Favour of Renewable Energy,” The Guardian, November 24, 2015, www.theguardian.com.

16. T.A.A. Heaps, “What Kind of World Do You Want to Invest In?,” November 16, 2015, www.corporateknights.com.

17. C. Cohn, “Investors Put Pressure on Miners to Respond to Climate Change,” December 16, 2015, http://sustainability.thomsonreuters.com.

18. CBS News/AP, "Mattel Apologizes to China for Toy Recalls," September 21, 2007, www.cbsnews.com.

19. A. Cooper, “Lumber Liquidators,” March 1, 2015, www.cbsnews.com.

20. E. Terazono, “Mitsubishi Seeks Olam’s Sustainable Approach,” October. 28, 2015, www.ft.com.

21. J. Blas and J. Koh, “Mitsubishi to Buy 20% in Grain Trader Olam For $1.09 Billion,” August 27, 2015, www.bloomberg.com.

22. “Volkswagen Is World’s Most Sustainable Automotive Group,” news release, September 11, 2015, www.volkswagenag.com.

23. M. Hower, "Could Sustainability's 'Survey Fatigue' Launch a $1 Billion Industry?," April 2, 2015, www.greenbiz.com.

24. R.G. Eccles, “In This Corner, DJSI; and in This Corner, Materiality. Ding!,” July 2015, www.materialitytracker.net.

25. “Atlas Copco Annual Report 2015” (Stockholm, Sweden: Atlas Copco, 2015), 127.

26. M. Khan, G. Serafeim and A. Yoon, "Corporate Sustainability: First Evidence on Materiality," Working Paper 15-073, Harvard Business School, Boston, Massachusetts, March 2015, http://hbswk.hbs.edu.

27. G. Ruddick, “BP Reveals $6.3bn Quarterly Loss Owing to Deepwater Horizon Bill,” Guardian, July 28, 2015, www.theguardian.com.

28. D. Schorn, “The Explosion at Texas City: 2005 Refinery Explosion in Texas Killed 15, Injured 170,” October 26, 2006, www.cbsnews.com.

29. F. Barringer, “Large Oil Spill in Alaska Went Undetected For Days,” New York Times, March 15, 2006.

30. D. Kiron, N. Kruschwitz, K. Haanaes, M. Reeves, S.-K. Fuisz-Kehrbach, and G. Kell, “Joining Forces: Collaboration and Leadership for Sustainability,” January 12, 2015, www.sloanreview.mit.edu.

31. D. McHugh and P. Pylas, “Volkswagen Is Paying a Hefty Price for Scandal,” October 6, 2015, www.usnews.com.

32. More results from this survey can be found on the NIRI website. See NIRI Analytics, "Corporate Sustainability Communications Practices Report — 2015 Report," January 15, 2016, www.niri.org.

33. M. Santisteve, "The IR Opportunity to Communicate Sustainability," November 24, 2014, www.irmagazine.com.

34. “GE Ecomagination: Powering the Future,” brochure, n.d., www.gesustainability.com.

35. Source: Florida Ice and Farm Financial and Sustainability reports 2010-2014; http://www.florida.co.cr/website/SocialResponsibility/index/37.

36. This example is cited in Esty and P.J. Simmons, “The Green to Gold Business Playbook” (Hoboken, New Jersey: John Wiley & Sons, 2011), 53.

37. Johnson & Johnson, “2013 Citizenship and Sustainability Report” (New Brunswick, New Jersey: Johnson & Johnson, 2013), 83.

38. The 79% figure is derived from the company’s EBITDA margin (34%) and industry average EBITDA margins (19%). The data is sourced from the company’s website and BCG analysis.

39. P. Ziobro, “Al Gore Fund to Pour $30 Million Into Seventh Generation,” Wall Street Journal, September 17, 2014, www.wsj.com.

40. S. Ng, “Seventh Generation Picks Up Bobble Brand,” Wall Street Journal, September 17, 2014, www.wsj.com.

41. “Gamila Product Line Acquired by Seventh Generation,” news release, July 15, 2014, www.gamilacompany.com.

42. A. Field, "More About Seventh Generation's $30M Infusion From Al Gore," October 12, 2014, www.forbes.com.

43. M. Reeves, K. Haanaes, and J. Harnoss, "Tomorrow Never Dies: The Art of Staying On Top," November 19, 2015, www.bcgperspectives.com.

i. J. Fallows, “The Planet-Saving, Capitalism-Subverting, Surprisingly Lucrative Investment Secrets of Al Gore,” Atlantic, November 2015, 84-94.

ii. Ibid.

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Comments (4)
TimothylefDF TimothylefDF
I’m impressed, I have to say. Really not often do I encounter a weblog that’s each educative and entertaining, and let me let you know, you've gotten hit the nail on the head. Your idea is excellent; the difficulty is something that not enough people are talking intelligently about. I'm very glad that I stumbled throughout this in my seek for one thing relating to this.
Epic Ram
Its so helpful for me to decide the investing methodologies and risk through it.
Malcolm Irwin
In regard to the very valid points you are outlining Nik.........for me there is one other question which should be asked "WHY".   Without fully understanding the WHY logic and motivation there really in no purpose in investing.   

Asking WHY gives a logical and justifiable sequence based on Why, How, What to provided a clear purpose for the investment and how it relates to sustainability and business objectives.

For me using your what and how from above (slightly modified) the decision to invest  would be based on:

Why are we as a business investing in sustainability (is sustainability part of the company wide objectives) ?

How will we as a business investment in sustainability to meet our objectives (i.e. our sustainability and business objectives.)?

What will the outcomse of investing in sustainability provide to the business (tailor made to the scope of industry and business objectives)?
Nik Zafri Abdul Majid
Good findings. It is clear there is still a lot of work to be done.

I think the lack of understanding is due to failure to relate sustainability and business objectives. Going back to basics "What and How"

a) What is the objective of investing in sustainability - (tailor made to the scope of industry)

b) How to achieve such objective? (is sustainability part of the company wide objectives?)

Quoting a report entitled : 

Embedding Sustainability in Organizational Culture, Prepared By:

Dr. Stephanie Bertels, Faculty of Business, Simon Fraser University
Lisa Papania, PhD Candidate, Simon Fraser University
Daniel Papania, PhD Student, Simon Fraser University
with research assistance by Sara Graves

"A portfolio approach to embedding sustainability

1) Fulfilment - Practices for delivering on current sustainability commitments

1.1) Fostering Commitment - engage, signal, communicate, manage talent, reinforce

2) Informal - Practices that affect values and behaviours

2.1) Building Momentum for change - raise awareness, champion, invite, experiment, reenvision, share

3) Innovation - Practices that move the organization further along the path to sustainability

3.1) Instilling Capacities for Change - Learn, Develop

4) Formal - Practices that establish rules and procedures

4.1) Clarifying Expectations - codify, integrate, assign, train, incent, assess, verify, audit "
------------------

This goes back to PDCA and along the way, Risk Identification, Mitigation, Assessment and Improvement.

Every corporation wishing to invest in sustainability must first have their own framework first! And it has to be clear and understandable.


Nik Zafri