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Investors, Measurement, Reporting, Stakeholders

Measurement and valuation of sustainable business – some conclusions

It was generously sponsored by EY and Trucost. IMG_0264

Here’s a few of the conference takeaways from the 100 or so companies,   investors and other experts who took part.

There’s a downloadable PDF of the below here.

 This is a non-exhaustive list of some of the points and interesting   arguments that caught our attention during the two days of the recent conference. We hope they are useful.

  • There is no consistency of language in the measurement and valuation of corporate sustainability, but having a common financial language can make it easier to drive change.
    • The lack of a common language and shared understanding is a barrier for progress. Using hard numbers can be useful to get mainstream business and financial institutions attention, start conversations and build consistent understanding amongst a diverse range of stakeholders.
    • Stakeholders are also looking at value through different lens. Putting a financial value on natural capital/ecosystems and social capital can be helpful to understand their benefits and make investment choices. In order to make better decisions companies need to share a lot more of their environmental and social accounts which can become standardised.
  • ‘One size doesn’t fit all’ when collecting and recording data. Companies need to do what is right for their business to help them understnd their risks, impacts and opportunities.
    • Companies have different motivators and views on the importance of numerical data as they want useful data that enables them to make better decisions. An organisation needs the right measurement objectives that fit with its objectives, strategy and processes.
    • Investors are looking at how to compare companies and want something that is quick and speaks their language. But context matters when making comparisons – local, regional, national and sector differences makes comparisons between company data difficult.
  • A company’s sustainability progress is more nuanced than just financial numbers. Qualitative information can be just as important and often more useful to companies and investors.
  • Putting a numerical value can be transient and often disproved. It can also be difficult to account for what has been avoided. Companies should explore different ways to show information that is meaningful to show impact and engage people. For example: geo social impact mapping.
  • Qualitative information can be just as important for companies and investors to gain an overall understanding of a company’s ability to manage risks, understand impacts and therefore make decisions. For example, what is the culture of the organisation? How competent is the management team in making decisions?
  • Companies need to develop a compelling narrative in order to engage investors as well as help drive behaviour change internally in the organisation.
  • The complexity of sustainability issues needs to be brought into the discussion and woven into a clear narrative that tells the company story and bring the numbers to life. Companies need to help investors and other stakeholders understand their sustainability performance by explaining the context.
  • Companies need to build awareness and understanding of their culture and the competeIMG_0267ncy of the management team to deal with complex sustainability issues in order to deliver the company strategy.
  •  Investors are still largely focused on how companies are identifying and managing their risks while other stakeholders, namely NGOs and employees want to better understand impacts at an operational and systemic level.
    • Analysts have limited time and are therefore primarily focused on a company’s own operations. They look at how companies identify, assess and manage risks.
    • NGOs believe that if companies are not looking at good practice in their own operations as well as systemic issues then they are part of the problem and not the solution. Employees want to understand and measure the impact of their sustainability activities to help them make better decisions.
  • Markets need to recognise and quantify market failures that affect the environment, and develop incentive mechanisms to help drive change and promote the long-term sustainability of companies.
    • Companies have little incentive to take account of environmental or social externalities in their decision-making. As a result, the market rarely incorporates true costs of environmental or social externalities.
    • Payments for environmental services (also known as payments for ecosystem services or PES), are payments to farmers or landowners who have agreed to take certain actions to manage their land or watersheds to provide an ecological service. Adding PES to existing regulatory schemes can make them more effective in protecting both environments and livelihoods
  • Investors want to have quantitative and qualitative information that helps them understand the company’s overall performance. Information should be shared concisely and through face to face conversations.
  • Investors want a clear narrative supported by some quantitative figures to help understand the business, and how ESG factors are material to the overall financial performance of a company.
  • While information is important there is no substitute for a conversation to get answers to the questions that financial numbers can’t show. For example, what mistakes has the management team made in the last five years that on reflection you would do differently? How do you treat your employees?

The divestment movement has helped to publicise sustainability issues and put pressure on companies to change. However divestment may not be the answer to deliver medium to long-term business model change, particularly in the oil and gas sector.

However there may be more financial value in letting a company go into run-off which results in exploration cap-ex being cut and where cash flow and dividends can be maximised.

Current economic models and theories do not take a truly systemic view on value and value-creation or recognise the limits of growth.

  • Economic thinking and practice need to shift in order to support the creation of a sustainable society. Economists, analysts and traders need to gain the skills and capacity to understand and use systems thinking, and understand the range of alternative ideas and strategies.
  • There is a need to look at new sustainability impact metrics through the lens of a systems perspective and recognise the carrying capacity of the planet.