A recent article in the Wall Street Journal reported that Morningstar, a popular investment research and management firm, is releasing a new product that awards portfolios fund-level ratings based on environmental, social, and governance (ESG) factors. This highlights a big trend that we’ve been talking about for some time—it’s time for publicly traded companies to get serious about sustainability. More and more investors are valuing how well you score on ESG metrics.
Even before the launch of Morningstar’s rating system, which will be available for free to the public, the number of funds that focus on ESG metrics grew from $4 trillion in 2006 to $59 trillion in April 2015, according to the Principles for Responsible Investment Initiative. Investors are starting to see progress from companies that embrace sustainability. Research from Harvard Business School shows that companies that focus on material—not just any—sustainability metrics outperform the stock market by an average of 6%.
“Materiality forces a focus on what issues are core to your long-term business success—whether it’s as obvious as the importance of water prices and supply to a beverage company, as specific as energy and grid reliability for a big software company with critical data centers, or as nuanced as sustainability’s importance to attract millennial employees in an intensifying war for technical talent.”
OK, so you’re convinced that ESG metrics will now play a big role in your company’s valuation. Where do you go from here?
Establish Effective Internal Reporting
First, it’s critical to make sure you have an internal reporting infrastructure that facilitates effective, confidence-inspiring reporting. If there’s one thing this announcement proves, it’s that you will need evidence that your organization has embraced sustainability.
Investors are no longer satisfied with greenwashing press releases with bold claims that are not backed by a meaningful audit trail of data. Even more importantly, as key business inputs like energy are increasingly considered material to overall business operations and profitability, claims that aren’t backed by hard data create serious litigation risks.
Conduct a Materiality Analysis
You’ll notice that having an internal reporting structure came first on this list; that’s because without the right data, it’s really difficult to know what’s material. But once you have a strong handle on your current status, a materiality analysis can help you determine where to focus your improvement efforts. A materiality analysis is voluntary—for now—but the Securities and Exchange Commission (SEC) is starting to increase its requirements on this front. The Sustainability Accounting Standards Board (SASB) has published a helpful resource to get started—the SASB Materiality Map—but many companies, like the consulting firm PwC, can also assist on this front.
Make Sure Your Energy Strategy Includes All Stakeholders
If energy is one of your material business drivers, it’s important to develop your energy strategy with C-suite and cross-functional accountability to enable high-quality decision making. Too often, responsibility for energy is delegated down to the facility-level, and rarely gets much attention from top-level decision makers.
Energy needs to be evaluated similarly to other initiatives intended to generate significant long-term changes. Strategic focus on achieving sustainability goals should be led by the C-suite, with a structure that creates accountability from the top and enables global collaboration and alignment among energy stakeholders, including operations, finance, purchasing, and sustainability. Organizations that are serious about energy management need to develop a clear vision, strategy, and governance approach to energy.
As a side note, if you’re reading this and thinking “this all makes sense, but I work in operations or facilities, and worrying about Wall Street is someone else’s job,” don’t be too quick to downplay the relevance to your day-to-day responsibilities. One of the biggest challenges we hear from the teams on the ground is that there’s never any budget to invest in energy management projects, despite the indisputable positive ROI. If that’s the case in your organization, try positioning your proposal in the context above—you just might be surprised how much budget is available when you’re talking like a CFO.
