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Investment in corporate capital is becoming increasingly responsible. And with good reason, as the risks and poor control of the CSR impacts of the companies in which financiers invest can cost them dearly. At the Produrable trade show, we attended a conference entitled "New horizons for responsible investment." This conference was co-hosted by BNP Paribas, Mirova, and Groupama Asset Management. Drawing on the findings of the MIT Sloan Management Review's "Investing For a Sustainable Future" study published last May, we would like to revisit these new concerns among investors and the need for companies to work on their non-financial communication.
New decision-making criteria for investors
Investors are stakeholders that should not be overlooked when discussing CSR commitments. In 2014, according to the US-based Responsible Investment Forum, $1 out of every $6 was invested in responsible investment strategies. This represents a 76% increase since 2012. At the same time, last week, Novethic, the SRI fund certification label, announced its figures for 2015 in France. This was a record increase of 29% between 2014 and 2015, representing $746 billion in assets managed according to ESG (environmental, social, and governance) criteria. Investors have understood this. It is no longer possible to ignore the non-financial performance of companies. Doing so risks obscuring significant dangers to the sustainability of their financial portfolios.
According to the study "Investing For a Sustainable Future," 80% of investors surveyed indicate that good non-financial performance improves a company's long-term value creation potential. More and more of them are evaluating the efforts made by companies. Their goal is to integrate material CSR issues into their business model—issues that affect or could significantly impact their ability to grow or even survive in the market.
The CSR strategy must guide, develop, and influence the company's business model. According to the study "Investing For a Sustainable Future" published by MIT Sloan Management Review in May 2016, 60% of the companies surveyed believe that social responsibility, embedded in the company's business model, contributes significantly to its economic success. The Energy Transition Act is a step in this direction. It reinforces the many initiatives aimed at measuring ESG risks for companies and management companies, particularly those related to climate change. Article 173 requires management companies and institutional investors, including banks, to describe in their 2016 management reports how ESG criteria are taken into account in their investment policies and the measures implemented to contribute to the energy and ecological transition.
Failing to take non-financial risks into account, or taking them into account only to a limited extent, can scare off or discourage investors. Remember the Mattel scandal in 2007. It led to the recall of more than 20 million toys on the Chinese market due to the presence of lead paint. The result was as dramatic as the discovery itself: a freefall in the company's share price on the stock market. According to the "Investing For a Sustainable Future" study, 60% of decision-makers at investment fund companies say they are prepared to divest from companies that have poor control over their CSR issues. The excitement surrounding COP 21 and the signing of the universal climate agreement by 195 countries has put the energy and fossil fuel sectors in the spotlight.
To date, more than 400 institutional investors and 2,000 independent investors from 43 countries have committed to divesting more than $2 billion from assets linked to these sectors. This is particularly true of Norway's largest pension fund, Kommunal Landspensjonskasse, which has redirected all of its investments linked to the coal industry towards funds dedicated to the renewable energy sector. Insurance companies are also paying close attention to these investment guidelines. Allianz SE divests any investment if the company generates more than 30% of its revenue from the coal industry or if it produces more than 30% of its energy from this fossil fuel.
Non-financial performance, the foundation of the company's overall performance
This rise in SRI can be explained in particular by the emergence of new analysis and modeling practices demonstrating how responsible investment can be a source of shared value. Many investment funds have set up centers of expertise on these topics. Academic research has also accelerated in order to demonstrate the link between effective CSR management and corporate financial performance.
In 2015, 90% of the 200 studies reviewed by Oxford University and Arabesque Partners showed that compliance with CSR standards reduces a company's cost of capital. At the same time, in 90% of cases, these same studies highlight that strong environmental, social, and governance practices enable companies to manage their operational performance. The study "Corporate Sustainability: First Evidence on Materiality" also highlighted that companies that were most effective at identifying material CSR issues outperformed less effective companies, suggesting that this generated value for shareholders.
These findings were confirmed again this week. On Monday, May 30, 2016, the newspaper Les Echos published an article on the quantitative study conducted by PwC and the investment fund Eurazeo. The article states that the savings generated by the implementation of CSR plans in six of its holdings (Accor, Léon de Bruxelles, Foncia, Elis, Peters Surgical, and Dessange) have reached more than €180 million since 2011. All this thanks to the attention paid to fuel and water consumption and the management of employee absences.
Non-financial reporting: how to communicate with investors?
The assessment of a company by non-financial rating agencies is no longer the only guarantee of confidence required by investors and shareholders. Only 36% of respondents believe that this can influence their investment decisions, according to the study "Investing For a Sustainable Future." In their view, companies spend more time responding to these questionnaires than implementing CSR actions. This is due to the complexity and scope of the information to be collected.
So how can companies respond to investors in a structured manner to demonstrate their effective management of CSR issues? How can they improve their non-financial communication? CSR reporting is a wealth of information that can be used to report on non-financial performance. The American SASB standard was developed with this in mind, to guide listed companies in publishing a limited number of key performance indicators in their 10K forms, depending on their sector of activity. This makes it possible to compare the performance of different companies.
Like in the United States, the Delphi study project brings together investors and financial analysts. This Delphi project is an initiative of the European Business Network for Social Responsibility and State Street Global Advisers. Its objective is to develop a set of ESG indicators that can be used to measure a company's overall performance. The Principles for Responsible Investment, a United Nations initiative, can also contribute to better communication. This is thanks to the tool they provide to companies to assess 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 aimed at investors. The remaining 80% do not consider non-financial performance to be a factor in competitiveness (Investing For a Sustainable Future study). This point highlights the need to develop a multimodal non-financial communication strategy for the company's key stakeholders. Investors, like customers and NGOs, also have specific requirements regarding the data they want to access.
Photo credit: Sang-Eun Kim