With the UN pushing to cut greenhouse emissions by 7.6 percent every year between now and 2030, the time to act on climate is now. As sustainability and impact investing become mainstream, companies are facing more pressure from all sides -- investors, employees, consumers and media -- to up their game.
Investors are taking a stand on climate action.
As the concern for the climate crisis heightens, interest in sustainable investing has steadily increased to 85%, up from 75% in 2017. With the demand for sustainable investment options on the rise and the pending financial risks associated with climate change, asset management firms like BlackRock are zeroing in on how they can make sustainable investing a priority.
BlackRock CEO Larry Fink recently announced plans to make environmental sustainability the focal point of the company’s investment decisions and the foundation of client portfolios moving forward. The firm is taking decisive action with plans to exit investments that pose a high risk to sustainability, including divesting from firms that generate more than 25% of revenue from thermal coal. BlackRock has also joined Climate Action 100+, making it the largest firm to sign on thus far.
They’re not satisfied with the current state of reporting.
With concern for sustainable practices mounting, investors will look to utilize environmental, social and governance (ESG) data to understand how a company is performing against goals and aiding investment strategy. Companies have started to respond to this demand: 86% of S&P 500 companies published sustainability reports in 2018.
However, simply publishing reports isn’t enough to meet investor standards. Many investors lament the lack of standardization across the multitude of reporting frameworks available. For example, a majority of companies use GRI reporting, but SASB is often the preferred framework for investors because it provides greater transparency and better risk management, and it is better suited to help “identify, manage, and report on sustainability topics.”
Another reason investors are dissatisfied with current reporting is the data itself. In a survey conducted by the World Resources Institute, investors listed the most critical issues plaguing the reports they see:
• Poor coverage across the portfolio.
• Immaterial or generic language, rather than robust quantitative KPIs.
• Inconsistent third-party evaluation.
Businesses can improve reporting in a few ways.
Investors are looking to support companies that make ambitious efforts to curb their environmental impact -- and that have the data to prove it. So what can businesses do to step up and meet investor standards? These first steps can help:
• Settle on a standard framework for sustainability reporting. 75% of investors believe that there should be one standard for sustainability reporting. SASB standards can better help investors factor in ESG and sustainability-related impacts. Businesses should also consider implementing science-based targets to identify clear and concise benchmarks that align with the current state of climate change and track their progress.
• Get external assurance on reported data. A McKinsey survey found that nearly all investors surveyed would prefer that sustainability reports undergo an external audit to increase their confidence in the information. Companies that don’t currently audit their data should consider joining the 17% of companies across the globe that do.
• Consider integrated reporting. Consolidating financial and nonfinancial reporting provides substantial benefits to investors as they evaluate a company’s strategy and performance. Mitsubishi’s 2015 integrated report naturally showed the company’s commitment to sustainable economic, societal and environmental value.
• Don’t gloss over failures. Companies should be transparent about both their successes and their failures. For example, Marks & Spencer details its sustainability goals in three categories: achieved, on plan and behind plan. When companies openly share the road blocks they face and the steps they plan to take to overcome them, it boosts their credibility.
• Start at the source. To better meet investor standards, companies should rely on data that includes comprehensive detail and has been audited for accuracy. After the past decade of working with corporate energy managers to automate their utility data collection, I expect energy and sustainability reporting to only grow in complexity -- especially given the advent of renewables, DERs and EVs. That makes reporting verified, granular data more and more critical with each passing year.
With more than 450 investors signed on to Climate Action 100+ and 114 Fortune 500 companies committing to sustainability initiatives, it’s clear that the conversation around planning and proving sustainable practices won’t be ending anytime soon. Shareholders have spoken -- it’s time for businesses to answer the call.
