Sustainable Business and Shareholders
A board of directors’ focus on maximizing shareholder value does not need to be at odds with maximizing sustainability. In fact, pursuing sustainability initiatives can boost value.
As Latham & Watkins notes, “Recent studies show a positive correlation between a company’s adoption of sustainability policies and its outperformance of counterparts over the long-term in stock market and financial performance.”
So, boards should take a closer look at how they can incorporate sustainable energy analytics policies, both in terms of their own interactions with shareholders and their oversight of management.
Create Investor Demand with Sustainability
Investors are increasingly allocating to companies based what are known as environmental, social and governance (ESG) factors or, similarly, sustainable, responsible and impact investing (SRI). From 2014 to 2016, SRI investment grew by more than 33% to total $8.72 trillion in assets, according to US SIF: The Forum for Sustainable and Responsible Investment.
Thus, boards should make sure that their companies are not left out based on these screens. By encouraging management to adopt SRI-friendly policies and by providing the governance that investors are looking for, such as with sustainability-related disclosures, boards can satisfy existing shareholders while also attracting other asset managers and high-net-worth investors, thereby creating demand for the company’s stock.
Aside from the potential stock price benefit stemming from this demand, boards can benefit by gaining large shareholders that are aligned with the company’s policies. Even though these shareholders may take on somewhat of an activist role, it is arguably a better form of activism from a director’s point of view since it leads to long-term value, rather than a shareholder that wants to enact short-term change through stock buybacks or dividend increases.
And as Latham & Watkins adds, “Many ESG initiatives and energy investments not only have potential to build long-term value but are cost-effective even on a short-term basis.”
Stay Ahead of Risk and Regulation
In addition to creating investor demand, directors that embrace sustainability can help companies stay ahead of certain risks and regulations.
For example, stock exchanges in China and South Africa have certain ESG disclosure requirements, and the SEC in the U.S. has looked into these types of issues as well, as PwC notes. Even if companies are not facing disclosure requirements now, the world is trending in that direction, so boards can get ahead of this by starting to figure out now how they should disclose various metrics.
Aside from disclosure, companies also have to increasingly adhere to laws or public pressure in regard to products themselves, ranging from emissions standards for cars to the sourcing of sustainable palm oil in food products.
By leading companies to adopt sustainable practices now, boards can reduce the risk of fines for regulatory noncompliance, as well the risk that stakeholders like customers and employees will turn away from the company, thereby decreasing value.
And on the flip side, boards can help companies create shareholder value by recommending that management adopt more sustainable practices, as it can lead to positive press coverage and increased sales. A Cone Communications and Ebiquity global study found that 84% of consumers seek out responsible products whenever possible, while 90% would boycott a company if they found out about irresponsible or deceptive business practices.
So even if an upfront cost to implementing sustainability measures seems daunting, boards have a clear impetus for companies to do so.
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