Published as introduction to Institutional Shareholder Services annual research report, April 2019
This year, great progress has been made in understanding the materiality of sustainability issues through robust quantitative analysis and the release of new, evidence-based standards. It is now generally accepted that sustainability needs to be analyzed through an industry lens in order to make sense of it, a concept that was still nascent in 2011 when I founded the Sustainability Accounting Standards Board (SASB). As a result, the move to embrace sustainable investing by investors of all types continues to accelerate.
According to US SIF, $1 in every $4 is now invested with a sustainability lens. Institutional investors with more than $80T in AUM have declared allegiance to sustainable investing through UNPRI, and 75% of individual investors express a preference for sustainable investing and are beginning to act on it. In fact, not only are individuals embracing alignment of their values with their savings, innovations in fintech such as say.com and yourstake.org are enabling crowdsourcing of societal concerns to drive corporate access and shareholder proposals – a mechanism for active ownership previously only available to larger, more sophisticated investors and their managers.
Achieving particular sustainable investment goals, whether they be driving financial returns, driving positive impact, or some combination of the two, depends on understanding materiality. Materiality is what aligns fiduciary duty with sustainable investment, making it not only appropriate to consider ESG factors but negligent to not. Materiality also enables investors and companies to find common ground, focusing efforts on those issues that matter most to reduce exposure to risk or to drive value. After all, financial benefits are only realized through actually improving sustainability performance on material issues – hence, a value-oriented and values-oriented approaches to investing are more sympatico than one might think.
But it’s not enough to know what issues are considered material in what industry. How a sustainability issue becomes financially material is perhaps even more important. The progression of an emerging sustainability concern into a full blown financially material risk – i.e. a risk that needs to be managed by prudent investors- can be triggered by changing social norms or expectations (on the part of customers, employees, or society); industry innovation or industry disruption (depending which side of it you are on); regulations or policy action; and/or environmental constraints and limits to critical resources. A material event can also be triggered by the company’s own actions – through negligence, ethical lapses, or a general misalignment of company interests with societal interests. An issue that has one or more of these pressure points at play will become material faster, and with a greater intensity than another issue.
This year saw the tipping point of the #metoo movement, as well as the “last straw” regarding plastics. Both originated from stakeholder concerns, amplified through social media, which ultimately created financially material situations for companies and their investors. The pathway to materiality matters. It helps investors and companies to identify potentially material issues early on- so that action can be taken to mitigate, avoid, or transfer the risk, before it materializes. Sustainability issues are not static, they are dynamic and constantly evolving. So while we have a much better understanding of what is material today, and access to much higher quality, decision-useful information than ever before, don’t be lulled into thinking that better information about material issues means lower risk. All it means is that the risk will be better priced.. Use the information in this report for insights- and take action to understand and mitigate risk, not just to avoid it. Watch for the material issues that signal the tectonic shifts happening in our society and environment. If unchecked, these will also have a material effect on companies, their investors, and even the markets at large.
