(How) do investors integrate sustainability into intrinsic valuation?

Strap-in!

This isn’t a light and breezy, take it or leave it kind of post.? If I write it clearly, it will leave a proportion of asset managers, investment research providers and companies fundamentally re-evaluating their sustainable investment / ESG practice and development activity for 2024.

“How so, Mike?!”

Last year, WBCSD’s CFO Network and Redefining Value team presented themselves with a couple of questions:

• (How) do investors integrate sustainability into intrinsic valuation?
• (How) should this affect the ways that companies communicate on sustainability to investors?

These are significant questions.

For all of the debate in ESG & sustainable investment about reporting and data and standards and stewardship and benchmarks and bla… and bla… and bla…, it all really comes down to these questions.

If fundamental active investors (the marginal buyers and sellers) integrate sustainability into intrinsic valuation, then they will allocate capital accordingly which will lead to a gradient between the cost of capital for sustainable activity and the cost of capital for unsustainable activity.? It will create an incentive for companies to become more sustainable.

So, are investors really putting their money where their mouths are to support sustainable transitions?

You can see why SRI-Connect was pleased to support WBCSD - to help find answers to these pertinent questions.? This involved outreach to many of the world’s leading sustainable investors and investment research firms and the answers were published at the end of 2023 in this guide: How investors integrate sustainability factors into intrinsic valuation .

There is evidence that investors (and research providers on their behalf) are finding ways to factor sustainability into intrinsic valuation but …

… and here’s what’s interesting …

… the way that it is done … when successful … is fundamentally different from what you would assume if you were to observe sustainable investment / ESG from outside … which is the position that most companies find them in.

Put another way, if a company wants to tick ‘ESG’ hygiene boxes, they need to supply the market with one type of information.? However, if they actively want to retain and attract the capital of investors committed to sustainability transition, the information that they need to supply and the questions that they need to answer are fundamentally different.

So, what next?

First, I would encourage all asset managers, investment research providers and listed companies to read the guide here and to compare their own investment integration and communications practice against it.

(It’s a 40 slide presentation comprising 20 slides of explanation and 20 slides of practical case studies)

Then:

• Asset managers and research providers that are already engaged in intrinsic valuation, please do share (below or directly) what you are doing … or even supply a case study to add to the library.
• Asset managers and research providers that want to develop their approach further in this regard, do get in touch with me directly.? This work maps a path and I look forward to helping others travel it.
• Listed companies – take note of the recommended ‘Actions for companies’ on slide 7 and the linked ‘tear sheets’ on how to organise ESG investor roadshows, target investors and analysts and prepare messages.

Finally, everyone, please recognise the contribution made by the case study contributors.? It is a measure of their industry leadership that they are prepared to put their analysis up for view in this rapidly evolving area.

While we need a critical mass of fundamental active investors to be doing this privately (so that capital moves), we also need some to do it publicly (thank you!) so that we can all learn.