The Corporate Sustainability Disconnect

These days, a public company that lacks an environmental, social and governance (ESG) policy would be the exception, rather than the rule. Yet, many organizations haven’t managed to clearly communicate their sustainability efforts to investors, despite the value of doing so.¹

Why do 97% of CEOs consider sustainability to be an important factor in business success, but only a handful believe that investors are interested in hearing about it? ²

In many cases, the communications breakdown occurs between sustainability teams and investor relations departments, according to a paper on sustainability disclosure by the Morgan Stanley Institute for Sustainable Investing. That disconnect may mean that some companies are missing out on opportunities to engage a wave of investors with growing interest in sustainable investing.

Anecdotally, investors say that companies don’t provide the information they need to account for ESG or sustainability, yet companies feel that investors aren’t asking for it. “This gap can mean that the investor relations and sustainability functions within a company are missing out on opportunities to collaborate,” says Hilary Irby, managing director and co-head of Morgan Stanley’s Global Sustainable Finance group. “Companies are making significant strides in managing ESG issues and embedding sustainability practices across their organizations,” Irby says. “And when these efforts are effectively communicated to investors, companies may benefit from greater investor interest.”

After interviewing numerous investor relations and sustainability executives already capitalizing on investor interest in ESG practices, the paper provides insights into how sustainability communication can be improved.

Executive and board leadership support can be a game changer in communicating the ESG business case to investors. Strong leadership also drives effective collaboration between investor relations and sustainability teams.

Investor relations teams very often do speak about ESG issues, but not at a depth that investors now increasingly demand. “Company leaders and investor relations managers may communicate with investors about specific issues, but investors seek a more strategic approach,” says Irby. “They want companies to focus on material issues, risk management and business value—information that more closely mirrors the audited and data-driven financial reporting in annual reports and 10-Ks.”

Sustainability teams need to work with investor relations more closely to determine exactly what kind of ESG information investors want.

Sustainability teams often publish reports detailing non-financial ESG efforts and investor relations departments do speak to investors from time to time about occupational safety or human rights in the supply chain. Yet this isn’t enough to satisfy investors. Investors want more financially material information that quantifies the business value of a company’s ESG practices.³

How can companies incorporate the business value of sustainability into their DNA? One way is to embed sustainability teams within core business departments, which can provide sustainability directors with access to senior executives, and deliver more useful information for investors.

Companies have access to a number of ESG reporting forums that provide guidance on best practice disclosure standards. For example, by adopting Sustainability Accounting Standards Board (SASB) industry standards, companies can provide evidence that they are seeking to increase their transparency when it comes to communicating material ESG issues.

Executives and investor relations teams should use public platforms, such as earnings calls, shareholder communications or speeches, to explain the value that sustainability brings to the company.

Also, instead of just releasing standalone sustainability reports, companies can incorporate sustainability reporting into quarterly earnings calls, 10-Ks and annual reports, tying ESG to their business and performance.