WRI’s blog series, The Hot Seat, interviews corporate leaders on ways that businesses can tackle environmental challenges while seizing opportunities. The series draws largely on the expertise of members of the Corporate Consultative Group, a diverse collection of leading companies working closely with WRI to advance corporate sustainability across the planet.
Despite the increase of green business practices, communicating sustainability’s financial value and demystifying data for mainstream investors continue to be a challenge for many companies. All too often, sustainability’s value is misunderstood by those seeking to quantify more immediate impacts on revenue growth and returns on investment. This is an issue that Kyung-Ah Park deals with daily as managing director and head of environmental markets at Goldman Sachs. We sat down with her to discuss how companies can better engage investors in their sustainability efforts.
WRI: We often hear that sustainability teams have trouble communicating the value of their work to investors, or that investors appear uninterested in sustainability efforts. What are the reasons for this?
Kyung-Ah Park (KP): First of all, when we talk about sustainability, I think oftentimes companies haven’t quite integrated it into the core of their strategy. So there tends to be a bifurcated communication. The sustainability journey often starts with managing risk and regulatory compliance, and then evolves to operational efficiency and cost reduction – the classic energy efficiency/savings argument. Where I think we’re starting to go is to talk about sustainability in the context of driving innovation and growth. It effectively becomes part of the DNA of a company.
The other challenge we face in the context of sustainability is around the dimension of time. Inherently, sustainability requires a longer-term perspective. Yet the capital markets put a spotlight on quarterly earnings and short-term performance, particularly for public companies. So the question remains: How can companies link sustainability performance to near-term business performance while balancing the long-term strategic levers that will “sustain” your competitive advantage?
WRI: So how would you answer that question?
KP: One analogous approach is to think about the investments companies make that are long-term oriented, such as R&D. Investors get that there is a longer time horizon for these types of investments, and without the innovative product pipeline, growth becomes constrained. We need to think about sustainability in a similar way.
For companies that are product and technology driven, such as pharmaceutical companies, there’s a very significant investment that needs to happen in R&D that drives continuous product innovation. These are often long-dated pipelines where we have to go through many different approval processes to test out the efficacy and ensure safety before reaching the market. But when you have a home run, it drives your fundamental growth and it enables you to accelerate your competitive advantage in the industry.
I think we need to help investors better understand that sustainability is an investment that you make throughout your organization to drive your long term strategy and outperformance. Simultaneously, we need to underscore that sustainability provides near-term benefits in the form of operational efficiencies and risk management. The key is to make sustainability a core part of your company’s strategy and values so that when you discuss financial return drivers, they are inextricably linked.
WRI: What are the strategies companies can employ to communicate the financial value of sustainability strategies to investors?
KP: I think we have to be much clearer about the financial linkages and materiality. We talk about sustainability initiatives such as energy efficiency or water conservation, and I think companies generally do a good job of bringing these down to the dollars and cents. But the challenge is packaging these initiatives into something that is material enough to really drive the bottom-line earnings and make it worthwhile for a CFO to communicate to analysts and investors on an earnings call.
It’s also about connecting how sustainability can drive the top line. An example can be innovation that brings improved product performance and lower environmental impacts. Companies that do so while meeting a core client need will drive growth and be recognized by the market. For example, developing advanced, lightweight material which is also recyclable can not only help automotive companies bring greater fuel efficiency—in turn helping these companies meet regulatory compliance and providing end consumer savings—but also help reduce waste and virgin material use. But at the end of the day, the conversation needs to be tied back to financial metrics – that is, translating this advanced material into potential dollar revenues and percentage growth.
WRI: So what would you say to investors that see sustainability as a side issue?
KP: Many investors have bought into the importance of environmental, social and governance (ESG) issues as an additional screen for identifying risk. But there is a further shift that’s happening-- and I think it’s been occurring at a faster rate over the last 12-24 months. We’re seeing more and more investors looking to identify long-term sustainable outperformers and differentiate information- and data-gathering practices to help drive investment allocation decisions. Specifically, many more investors are pledging investment allocations relating to sustainability.
In general, we can do a better job of helping investors understand the various external drivers that are making sustainability an imperative. Whether that be the long term trends of population growth and urbanization, which will put a significant focus on resource efficiency and resource sustainability, or climate change and extreme weather’s impacts that drive regulatory constraints and disrupt supply chains. Companies that integrate sustainability into their core strategy are stronger and more resilient. Making that tangible, via financial metrics, helps investors connect the dots.
WRI: Are there examples of companies actually being valued differently as a result of bringing sustainability into their business model?
KP: Take, for example, the utility industry. Between environmental concerns, resource constraints and energy diversification desires, there has been an increasing shift towards renewables, energy efficiency and demand-side management. Part of this is driven by regulatory and policy drivers, but another key driver is the value proposition of renewables, which are not only clean, but have become increasingly affordable.
Companies that have embraced this shift are diversifying their portfolios from conventional energy sources and pursuing a more customer-centric approach—one that provides greater information and choice and brings greater sustainability benefits. And that consumer-centric model transforms what was once a commoditized business into something that is differentiated, providing a competitive value proposition. Not only is it cleaner, but it is cheaper and it should get more resilient as well. Those co-benefits are going to provide a company with a meaningful value proposition that will be recognized by the market.
Margaret Gamble, an intern with WRI's Communications Team, also contributed to this blog post.
DISCLAIMER:Goldman Sachs is a WRI donor and member of the Corporate Consultative Group. The views expressed do not necessarily reflect those of WRI.