Feel- good investments must also be performers
INVESTORS who want to ensure their money helps companies to grow without sacrificing social and environmental values may be excused for being cynical when it comes to choosing which companies offer both profitability and a small environmental footprint.
For this is the green’’ era, a time of environmental responsibility, and companies are heralding their green credentials in advertising and the media, but not often enough, with formalised reporting on sustainability.
Like other investors, those who seek out sustainable investment vehicles also seek a healthy return. They want an investment which performs well but not at the expense of environmental and social issues. They really want the same things as the companies which strive to create shareholder wealth within current expectations of society.
Investments also need to meet the criteria that analysts use when assessing performance. The criteria evolve to meet changes in society with the latest performance framework used by many analysts looking at three factors: environment, social and governance.
The framework is commonly known as ESG and is emerging as a tool that measures the true social, environmental and profitable sustainability of a fund.
Leading companies approach sustainability through seeking competitive advantage and what is good for the business. An approach that strives only to save the planet’’ and does not contribute to the longterm financial health of the business will falter.
KPMG supports the ESG reporting framework which considers macro factors such as the economy and industry issues, together with micro aspects such as board independence and executive remuneration.
If a company follows ESG principals and aligns its business strategy with sustainability reporting, investors can more easily recognise the factors that make an investment attractive to them.
Avoiding greenwash’’, where people are misled about a company’s environmental practices, or the environmental benefits of a particular product or service, is only possible where there is clear communication about a company’s sustainability strategy, rigour in assessing performance and transparent reporting.
However, sustainable reporting is still an emerging area and this is reflected in the low number of Australian companies that produce sustainability reports. Australia lags international trends in this area, with just 35 per cent of Top 100 Australian companies completing sustainability reports compared to 76 per cent of Top 100 UK companies. While sustainability reporting in Australia has increased over the years, it is now likely to be further boosted by the needs of regulators ( who require reporting on issues such as greenhouse gas emissions), the capital markets ( which now include sustainability issues in their overall assessment of performance), investors ( who have an ever- increasing awareness of sustainability issues), and companies ( which are enhancing existing reporting frameworks to better fit wider societal trends).
Investors when seeking a sustainable investment may lean towards industries that support sustainable practices, such as alternative energy providers or carbon trading companies.
However, through gaining familiarity with sustainability principles such as ESG, investors can invest in a wide range of industries with the knowledge that the practices employed by forward- thinking companies are in themselves good for society while being good for shareholders.