“Seek first to understand, then to be understood.” These are the words of Stephen Covey, in his book ‘The 7 Habits of Highly Effective People.” This rule must be obeyed to optimize the circles of sustainability across an organization – all its functions, and stakeholder groups – to create actions for positive outcomes, illustrated by comparable metrics combined with compelling narrative.
For example, the investment stakeholder group. Investors, who may be insurance companies, pensions or NGOs, seek long-term risk adjusted returns, and there is growing evidence that suggests Environmental Social Governance (ESG) factors manifest themselves as investment risk and opportunities to impart value creation in portfolio companies. ESG is therefore increasingly material to the investment process. Moreover, according to the Global Sustainable Investment Review recently published by the Global Sustainable Investment Alliance (GSIA), as at the end of 2011, the global worth of professionally managed assets that incorporate ESG factors had reached $13.6 trillion and rising.
Indeed, the positive or negative affect of ESG performance can alter the value of an organization. Studies over the last forty years indicate the negative impact on value for low eco-efficiency is larger in magnitude to the positive affect on the high eco-efficiency organization, with the differential between the two, shown to increase over time. Notwithstanding, the performance of a range of sustainable investment portfolios indicates higher returns for investors. Additionally, of the previously mentioned US$13.6 trillion of professionally managed assets that incorporate ESG, the most popular investing strategy is negative / exclusionary, which equates to $8.3 trillion.
Moreover, a recent PwC survey for the Principles of Responsible Investment entitled Integration of ESG & Governance issues in M&A (Mergers & Acquisitions) Transactions, Trade Buyers Survey Results, shows that poor performance on ESG factors are used as a lever to reduce the value of a business by as much as ten percent. It being assumed, excellent ESG governance is accounted for in the selling price. Furthermore, once the demand for ten percent discount is exceeded, the willingness to do the deal may well be removed altogether. This suggests that the sale agreement for a US $200M company could be affected by $20M for poor ESG performance – if the deal goes ahead at all. ($20M is a great deal of money for having not taken sustainability seriously). It must further be noted, according to the PwC / PRI survey, 80% of deals have shown a reduced valuation, or the deal has not gone ahead based on poor ESG factors.