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Investment in corporate capital is becoming increasingly responsible. This is hardly surprising, as the risks and poor management of CSR impacts in portfolio companies can prove extremely costly for financiers. At the Produrable trade show, we attended a conference titled "New Horizons for Responsible Investment," co-hosted by BNP Paribas, Mirova, and Groupama Asset Management. Drawing on the findings from the MIT Sloan Management Review’s May study, "Investing For a Sustainable Future," we would like to revisit these emerging investor concerns and the growing need for companies to refine their non-financial communication.
New decision-making criteria for investors
Investors are a stakeholder group that cannot be ignored when discussing CSR commitments. According to the US Forum for Sustainable and Responsible Investment, $1 out of every $6 was invested in responsible investment strategies in 2014—a 76% increase since 2012. Meanwhile, Novethic, which certifies SRI funds, announced last week that France reached a record high in 2015, with a 29% increase in assets managed according to ESG (environmental, social, and governance) criteria, totaling €746 billion. Investors have clearly gotten the message: ignoring a company’s non-financial performance is no longer an option, as doing so risks overlooking significant threats to the long-term viability of their portfolios.
According to the "Investing For a Sustainable Future" study, 80% of investors surveyed believe that strong non-financial performance improves a company’s long-term value creation potential. An increasing number of them are evaluating corporate efforts, with the goal of integrating material CSR issues into the business model—specifically those that affect, or could significantly impact, a company’s ability to grow or even survive in the market.
A CSR strategy must guide, evolve, and influence a company’s business model. According to the study “Investing For a Sustainable Future” published by the MIT Sloan Management Review in May 2016, 60% of companies surveyed believe that corporate social responsibility, when embedded in the business model, contributes significantly to economic success. The Energy Transition Law supports this view, reinforcing various initiatives aimed at measuring ESG risks for companies and management firms, particularly those related to climate change. Article 173 requires management companies and institutional investors, including banks, to describe in their 2016 annual management reports how they incorporate ESG criteria into their investment policies and the measures taken to contribute to the energy and ecological transition.
Failing to adequately account for non-financial risks can drive investors away or lead them to divest. Consider the 2007 Mattel scandal, which resulted in the recall of over 20 million toys in China due to lead paint. The market reaction was immediate: the stock price went into freefall. According to the "Investing For a Sustainable Future" study, 60% of investment fund decision-makers are prepared to divest from companies that poorly manage their CSR issues. The momentum surrounding COP 21 and the universal climate agreement signed by 195 nations has placed the energy and fossil fuel sectors under intense scrutiny.
To date, more than 400 institutions and 2,000 individual investors from 43 countries have committed to divesting over $2 billion from assets linked to these sectors. A notable example is Norway’s largest pension fund, Kommunal Landspensjonskasse, which has redirected all its coal-related investments into funds dedicated to renewable energy. Insurance companies are also paying close attention to these investment shifts. Allianz SE, for instance, divests from any company that generates more than 30% of its revenue from the coal industry or produces more than 30% of its energy from that fossil fuel.
Non-financial performance: the foundation of overall corporate performance
This rise in SRI is largely driven by the emergence of new analysis and modeling practices that demonstrate how responsible investment can be a source of shared value. Many investment funds have established specialized teams to address these topics, and academic research has accelerated to make the link between effective CSR management and financial performance more tangible.
In 2015, 90% of the 200 studies reviewed by the University of Oxford and Arabesque Partners showed that compliance with CSR standards lowers a company’s cost of capital. Furthermore, 90% of these same studies highlighted that robust environmental, social, and governance practices help drive operational performance. The study « Corporate Sustainability: First Evidence on Materiality » also demonstrated that companies most effective at identifying material CSR issues outperformed their peers, indicating that this creates value for shareholders.
These findings were further confirmed this week. On Monday, May 30, 2016, the newspaper *Les Echos* published an article on a quantitative study conducted by PwC and the investment fund Eurazeo. The article notes that the savings generated by implementing CSR plans across six of its holdings (Accor, Léon de Bruxelles, Foncia, Elis, Peters Surgical, and Dessange) have exceeded €180 million since 2011, thanks to a focus on fuel and water consumption and the management of employee absenteeism.
Non-financial reporting: how to communicate with investors?
Evaluation by non-financial rating agencies is no longer the only benchmark for trust demanded by investors and shareholders. According to the "Investing For a Sustainable Future" study, only 36% of respondents believe these ratings influence their investment decisions. They argue that companies spend more time filling out these questionnaires than they do implementing operational CSR actions, a situation driven by the complexity and breadth of the information required.
So, how can you provide a structured response to investors to demonstrate a solid grasp of these CSR issues? How can you improve your non-financial reporting ? CSR reporting is a goldmine of information for accounting for non-financial performance. The American SASB framework was developed with this in mind, guiding listed companies to publish a limited number of key performance indicators in their 10-K filings, tailored to their specific industry. This makes it possible to compare company performance.
Much like in the United States, the Delphi study project brings investors and financial analysts to the table. This project is an initiative of the European Business Network for Corporate Social Responsibility and State Street Global Advisers. Its goal is to develop a panel of ESG indicators that reflect a company's overall performance. The United Nations-supported Principles for Responsible Investment can also contribute to better communication by providing companies with a tool to evaluate and communicate the financial impact of their CSR strategy.
In conclusion
Even though these tools exist, few companies think to communicate their CSR efforts to their investors. Only 20% of the companies surveyed have developed communications specifically for them. The remaining 80% do not view non-financial performance as a competitive factor (Investing For a Sustainable Future study). This highlights the need to develop a non-financial reporting strategy that is multimodal and tailored to the company's key stakeholders. Investors, much like customers or NGOs, have their own specific requirements regarding the data they want to access.
Photo credit: Sang-Eun Kim