Several recent studies point to the increasing number of companies that are translating their sustainability strategies into financial gains and competitive strength. Leading companies are generating sales growth with new environmentally conscious products and services, identifying eco-efficiencies that help them to trim costs and finding ways to better manage risk in a world of pollution challenges, natural resource limits and shifting opportunities for competitive advantage.
Nonetheless, most mainstream investors remain unconvinced that sustainability leadership translates into profits and marketplace success. Despite rising importance on the corporate agenda, sustainability — at least as currently understood and measured — interests only a small niche of investors. While some evidence exists linking sustainability leadership to market outperformance, most mainstream investors discount these findings and remain on the sustainability sidelines. Public companies and global stock market executives we have interviewed report very limited interest among investment advisors and analysts in corporate sustainability strategies. Most executives we spoke with agree that questions posed by mainstream asset managers or analysts about sustainability during quarterly earnings calls remain very rare.
One problem is that sustainability reporting continues to be framed in a language not familiar to mainstream investors. The prevailing sustainability metrics evolved over decades to meet the needs of “values” investors who were willing to sacrifice returns to promote their values — such as better social standards and environmental protection. These metrics, generally referred to as ESG (environmental, social and governance) data, grew in complexity as the sustainability umbrella expanded, enabling analysts to effectively screen for the presence or absence of a multitude of indicators for socially and environmentally conscious investors. While these data frameworks are essential for values investors and are useful for spotting downside risks, they were never designed to identify business value drivers. Today, these frameworks remain ill-suited to measuring the potential upside business benefits or financial materiality of sustainability. As a result, easily understood indicators that quantify the business value of sustainability in mainstream financial terms do not exist.
Corporate executives, already overloaded by requests for sustainability data, mostly from nonfinancial stakeholders, are reluctant to invest more in sustainability reporting until they see evidence of broad-based mainstream investor interest. At the same time, mainstream investors remain on the sidelines waiting for clearer indicators of sustainability’s financial impact.