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What Questions Should Investors ask About Firms’ Sustainability Plans?

David Logan, co-founder of Corporate Citizenship, says an understanding of investee companies’ values is central to understanding their sustainability strategies.

Asking the right questions to potential investees about their sustainability plan is essential to really understanding what this looks like in practice. On the face of it, a company might have what seems to be a watertight plan, but is this translating into their actions or the behaviours of employees? Are these behaviours present across the supply chain?

I have worked with numerous global companies over the past 40 years in sustainability and corporate responsibility and here I use this experience to help investors ask the right questions to investee companies and avoid the red flag answers.

Understanding the company values is key

The key question for any investor to ask of a company about its social responsibility and sustainability is: “what are the values you espouse when pursuing your commercial goals?”. Does the company have a clear statement of principles or values and can it articulate those values as a compliment to its business plan? Can it clearly say that it wants to be the best in its field, but will not, for example, use child and forced labour, it will respect employees irrespective of gender, race, sexual orientation or other characteristics and will do its utmost to protect the natural environment? If the company has articulated its values and standards of ethical behaviour in respect of its stakeholders and the wider society, then the investor can hold them accountable. A lack of clear values statement is an immediate red flag.

Alongside the company prospectus and statement to investors about their business mission and financial expectations, investors should ask companies for the clear statements of values to indicate their social responsibility and sustainability goals. Companies should also explain the governance procedures that will enable both to be achieved and how performance will be reported each year alongside financial results. This is the basis of the growth of ESG reporting that has been growing amongst the investor community.

Understand the data and values measurement

Investors rightly expect a company to publish financial reports to measure its profitability and general commercial success. Alongside this, ask for how compliance with values is also going to be measured. Companies are increasingly publishing ESG and other sustainability reports to demonstrate their success in living out their values. Values statements should not be woolly aspirations. A company can report on its wage rates, who its partners are in the supply chain, gender balance in management and accident rates, just as it can on its water and power use, the levels of waste it disposes of and recycling activity. Investors need to be asking for such data to be able to identify trends in each business and be able to rank them accordingly. The data will clearly demonstrate whether they are living the values they profess.

To make sense of the data, investors need to ask for benchmarks to give the company’s performance context. They can be national averages, industry norms or best-in class performance and more, all of these benchmarks show how the company is doing with regard to its economic, social and environmental sustainability. If companies truly believe in their values they will be measuring their performance just as they measure their business performance in so many other fields.    

Social Responsibility Investors (SRIs) are already doing this as they need to be able to include some companies in their portfolios and exclude others. The growth of frameworks such as of the multi-stakeholder Global Reporting Initiative (GRI), dedicated as it is to creating global standards of such reporting, shows that this trend for published data on sustainability is bound to become much more commonplace as more companies seek to make their contribution to the common good more explicit. Companies are not just profit-making machines, they are very much a part of the social whole. They are social organisations which contribute through activities in the marketplace but also much more broadly to society’s development by creating jobs and creating communities of work, paying taxes and confronting environmental problems for example.

Understand actions across environmental, societal and economic issues

Non-profits have been at the forefront of pressing the sustainability agenda on business, but beyond the SRI community, investors generally are increasingly playing a part in asking companies to share ideas and data about their contribution to sustainability. A lot of this is driven by the environmental crisis humanity now faces. Global warming is a threat to life on the planet and the capacity of companies to do business. Business is front and centre on the great environmental issues of our time because of the impact of the consumption of their products and services. Investors, other stakeholders and the public want to know that companies are playing a part in addressing this issue specifically.

Other pressing environmental, economic and social issues that must also be addressed – what are investee companies doing about these too? In many ways the environmental issues can be quite straight forward, they are science based which helps to set clear targets for performance. Social and economic issues can be more difficult to address as there may not be a clear consensus on the right approach. As they are social institutions of great importance in society and a central to building our human civilisation, companies need to be responding to these challenges too.

Arguably, companies have benefitted greatly from the collapse of communism and the many economic reforms of the past 40 years or so, but the price they must pay is one of being much more transparent about their economic, social and environmental impact on society. They are taking up ESG and sustainability reporting in an effort to explain what they do in society and investors will increasingly need to make use of this information in their investment policies and their ability to hold companies to account for their behaviour. They need to be pressing companies to improve their sustainability performance across not just the environmental, but also society and the economy, as they press to achieve a better financial performance.

Asking for a wider sustainability offering that focuses not just on one specific area of corporate citizenship, but encompasses the entire value chain makes it clear who views sustainability as a tick-box exercise.

Working with listed companies

Listed companies are only a minority of all the private companies in the world, but they are especially important because they represent a very large share of the global economy and organise much of its trans-national trade. Today, sustainability includes the impact of a business right along its value chain, not just the owned and operated business. Consequently, large listed companies can do much to help set standards of corporate behaviour around the world and this is important for investors to acknowledge because we need global collaborative solutions.

Over the past 40 years, global society, with limited exceptions, has welcomed private firms to the mix of social institutions because they provide so much of the goods and services humanity wants and needs. Allowing private citizens to take initiatives in the marketplace, like allowing them to take initiatives in the social arena through non-profits, has enriched society. However, the world has changed such that governments, companies and non-profits must now work together to help solve humanity’s problems. Now, large listed companies are not just expected to offer goods and services at low prices in the marketplace; society expects them to play a part with the other organised sectors of society. This being the case, large companies in particular need to have clear strategies to promote sustainability, often in partnership with others, and shareholders need to be kept appraise of what they are doing.

To truly be able to understand a potential investees practical sustainability plan, ask for a clear value statement with which you can hold the business and employees to account. Investors need to ensure they are provided with the data on progress and industry/global benchmarks to measure progress, not just sweeping reports. Also consider the wider sustainability efforts, not just a single area, and ask for how these policies are embedded throughout the value chain.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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