Company performance and aspirations are assessed by the equity market through the analysis of strategy and management capacity. But if CSR and sustainable development initiatives do not feature either explicitly or implicitly within that strategy, then companies are failing to create value from the work that they might already be doing.
While many companies have established CSR programmes, they tend to run parallel to the development of mainstream business strategy, with the result that they have not begun to define or influence company strategic direction, or – more crucially – mainstream investment decisions.
While there has been spectacular growth of specialised socially responsible investment (SRI) funds in recent years, such funds are still a small proportion – around 5% – of total available investment and as such, SRI policies still have a very minor influence over company behaviour relative to mainstream investment.
As yet, conventional financial management and analysis techniques employed by the mainstream equity market have not been able to truly reflect good corporate practice in CSR and sustainability, or to differentiate between companies that are seen to be “responsible” from those that have not engaged in the debate.
However, WWF research identified that the mainstream investment community is starting to wake up to the value that CSR and sustainability may have in two distinct ways:
- As an indicator of good corporate practice in general and;
- As a means of specific pointer towards decreased company risk and enhanced equity returns.
Intangible assets
Another important development in the mainstream equity market is that analysts are becoming a lot more comfortable with identifying and valuing areas of company practice that, like CSR, do not feature on the balance sheet as concrete company assets. Issues such as intangible value, brand equity, vision, management capacity and reputation are becoming significant drivers of total company value.
In fact, for some financial stakeholders, intangible value represents the majority of a company’s worth. Standard and Poor’s states that some 70% of its evaluations of overall business performance are derived from market intangibles.
Building on the opportunities that our research identified, To Whose Profit?(ii): Evolution presents a series of tools and techniques in existing use by the mainstream investment market which can be used to highlight how engagement in CSR and sustainability issues can grow value which can be measured and rewarded by the equity community.
Measuring sustainable performance
We uncovered four techniques which provide opportunities for companies to measure the contribution of sustainable performance to value creation and therefore drive positive investment in better performing companies:
- Where benefits could be expressed in terms of their impacts upon company earnings. Ask the question – does more sustainable behaviour or intentions make capital available to companies at a lower cost.
- Where benefits could be expressed in terms of their impacts on a company’s equity risk premium. This is an analysis of how companies manage their material business risks. If the analysis finds that a company is not managing its risks effectively this will decrease the predicted value of the company’s shares over time.
- Where benefits could be expressed in terms of drivers of shareholder value. These are aspects of company performance that are not based on financial facts and figures but focus instead upon company intention and capacity. More effective management of sustainability issues has the capacity to affect these drivers significantly and so can be used to identify sources of value growth.
- Where benefits can be expressed in terms of links with drivers of intangible value. Environmental, social and ethical issues have been identified as top-ten drivers of intangible value.
Sustainability as a material concern
By treating sustainability concepts as material business concerns, companies will be better placed to communicate the rationale behind their investment in sustainable business practice. This information can in turn be used to encourage meaningful and responsive dialogue with the investment community regarding the potential risk/opportunity premium associated with sustainability issues.
Also, the equity market needs to come to understand that commitment to, and progress towards, more sustainable business practice can be measured using a range of existing financial and economic analysis tools and that sustainability can be a powerful driver of company value.