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How Investors contribute to the sustainable economy

Tuesday, June 11, 2019

Sustainable Finance Series n.3/3

The European Commission’s Action Plan on Sustainable Finance underlines the key role of investors in supporting companies in their long-term value creation journey. CSR Europe’s Total Impact Disclosure approach offers a framework for the promotion of good practices in engaging investors and creating a better and long-term dialogue with the investor community. Discover the state of play regarding the implementation of the EU’s Action Plan at the webinar “Updates on Non-Financial Reporting and Sustainable Finance”, on 4 July 2019

 

Investors engaging companies to boost their sustainability performance is a major focus of the European Commission’ Sustainable Finance Action plan. Behind this active investment approach lies the idea of strengthening the relationship between investors and the long-term business strategy of reorienting capital flows towards more sustainable business and technologies. The EC action plan on sustainable finance works on the incorporation of sustainability into the fiduciary duty of institutional investors. Investors can push companies towards sustainability if they adopt an active investment approach: they should not only vote in the General Assembly but engage backstage with the management.

An EC proposal for a regulation on disclosures relating to sustainable investments and sustainability risks will introduce disclosure obligations on how institutional investors and asset managers integrate environmental, social and governance (ESG) factors in their risk processes. 

How to increase the role of investment in sustainable finance? The EU Approach

A successful transition to a sustainable world and economy requires the integration of ESG factors in investment decision-making processes. A shift in approach and laying some legal groundwork for investors and their clients bring a holistic and a healthier approach to investing and the way business is financed for a sustainable future.

What are the opportunities and challenges identified by CSR Europe and its members?

More and more companies report a clear line of communication between their sustainability teams to investor relations, Finance and to the investors themselves. But challenges remain. At the recent CSR Europe conference Valuing Corporate Sustainability Performance, co-hosted with the European Investment Bank (EIB), companies and investors identified three main areas to improve: Sustainability ratings; Making the CFO a sustainability ambassador; and Enhancement of social, environmental and climate disclosure. CSR Europe addressed all the three issues in its Sustainable Markets and Finance pillar, focused on making Total Impact Disclosure the new norm. The Total Impact Disclosure approach builds a fact-based and quality dialogue between stakeholders and investors to enhance social, environmental, climate and tax disclosure. In doing so, Total Impact Disclosure facilitates impactful investments by closing the gap between companies and investors. 

1. Sustainability ratings

They are made up of a vast number of information, which all together determine a score that often is of poor use to perform a qualitative analysis. Instead, it would be necessary to grasp how a certain company integrates and implements its own sustainability strategy in its business. Titan Cement pointed out the importance of making ratings more industry-specific. Currently, the same criteria are applied to heavy industries and services companies alike. However, different sectors need different KPIs.

2. Making the CFO a sustainability ambassador

There is a need to close the gap bringing sustainability teams, and portfolio managers into dialogue within companies’ functions. The solution? Making the CFO a leader and advocate of the financial and non-financial in one common strategy. This unleashes the long-term value of the company while building strong relationships with investors.

3. Enhancement of social, environmental and climate disclosure

It is important to build a fact-based and quality dialogue with investors. From the investor’s perspective, the main obstacle is represented by the absence of a metric to evaluate the sustainability of an investment. They need more information on sustainability to direct investments, as well as more information from reports that they perceive too often as incomplete.

 

Read Previous Installments of the Sustainable Finance Series:

Total Impact Disclosure as an enabler for companies to engage investors on sustainability practices (1/3)

Sustainable Finance: An EU-wide Taxonomy on green investments (2/3)

Register to the Upcoming Sustainable Finance Events:

Webinar on “Updates on Non-Financial Reporting and Sustainable Finance”, on 4 July 2019

Workshop on “Climate-Related Reporting”, on 7 November 2019