Sustainability and Shareholder Value

The JACF, with the support of the High Meadows Foundation, has just published the fourth (read the complete issue here) in what has become an annual series of issues devoted to the corporate “sustainability” question: how can companies address environmental and social problems while still earning high enough rates of return to attract the capital necessary to sustain themselves?

Our first sustainability issue featured corporate initiatives and investments designed to protect the environment while preserving—or, in some cases, even increasing—value for shareholders. The main focus of the second in our series was large influential investors and the growing role of “ESG” (environmental, social, and governance) criteria in their decision-making. That issue emphasized that public companies could find long-term “partners” among a small but distinguished group of “value-based” investors who have made ESG analysis a critical part of their stock valuation process.

Our third sustainability issue explained how companies could find such investors and persuade them to buy their shares. Most of the suggestions involved “integrated reporting,” a relatively new form of investor communication but one recently adopted by as widely admired a company as GE. Integrated reporting differs from the “sustainability reports” that provide exhaustive accounts of all corporate environmental and social activities. Integrated reporting instead aims to provide, within and as part of a company’s traditional financial statements, detailed accounts of only their “material” environmental and social risks—the ones that are capable of having significant effects on profitability and value.

And that brings us to the focus of this, our fourth, sustainability issue: the critical importance of identifying material corporate ESG exposures and of communicating to the capital markets both the plans to manage such exposures and their expected effects on corporate strategy and value. In our lead article, Harvard Business School’s George Serafeim and Chris Pinney, President of the High Meadows Institute, dispel a number of “myths” about ESG investing. The most prevalent, and misleading, of these myths is that ESG investors must settle for below-market returns. In reality, investors who have incorporated “material” ESG risks and opportunities into their decision-making have earned returns that are if anything higher than those earned by conventional portfolios, while exhibiting lower risk. Also in this issue, Jean Rogers, CEO of the Sustainability Accounting Standards Board, (SASB) and co-author (and former FASB head) Bob Herz discuss the practical import of SASB’s success in identifying and providing standards for corporate reporting on material ESG exposures in 79 different industries. But that success does not keep Bob Eccles and Tim Youmans of Harvard Business School from arguing that determinations of materiality are important “exercises of judgment” that should not be left to the SASB or to corporate managements. They should instead be viewed as the responsibility of corporate boards, which are urged to issue a one-page Statement of Significant Audiences and Materiality each year that explains their determinations of which exposures are material, and what the companies plan to do about them.

When we come to do our fifth sustainability issue a year from now, it will be interesting to see how many corporate boards have chosen to take this step. But even if the answer is none, the corporate share of mind for the concept of “materiality” should have increased significantly.

– Don Chew

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