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1、 2022 Boston Consulting Group1Fixing the Great Disconnect in SustainableInvestingThe BCG Value Creators Report 2022DECEMBER 15,2022 By Jody Foldesy,Gerry Hansell,Jeff Kotzen,Jesper Nielsen,Alexander Roos,Douglas Beal,and Hady FaragCorporate leaders have a pivotal role in bridging the divide betweeni
2、nstitutional sustainability commitments and day-to-day investing practices.For companies across the globe,pursuing sustainability oen involves difficulttradeoffs between longer-term opportunities and near-term costs.Investor supportis critical to striking the right balance.It gives management teams
3、confidence that 2022 Boston Consulting Group2capital markets will reward them for investing in sustainability through highershare prices and total shareholder returns.It also gives them time to deliver ontheir sustainability strategies without disruption from activist attacks or takeoverbids.On the
4、surface,investors support for sustainability appears strong.Leaders of topinvestment firms have voiced strong support for prioritizing long-termsustainability over short-term returns and profits.However,these top-of-the-housecommitments by investment firm leaders are not fully reflected at the rockf
5、ace ofinvestment decisionsa phenomenon we call the“great disconnect.”BCGs research over the past several years provides evidence of such a disconnect.In surveys and interviews,portfolio managers and analysts have told us that theyremain primarily focused on traditional investment considerations,espe
6、ciallypotential returns from medium-term growth and profitability improvement.Theypoint to a lack of clarity about financial returns as the most important impedimentto giving sustainability greater consideration in day-to-day investment decisions.Inturn,corporate executives are oen uncertain about w
7、hether capital markets willreward them for making choices that promote sustainability.As a result,companiesmiss opportunities to deliver stronger long-term returns to shareholders byreducing material sustainability risks and/or tapping into new profit pools.Bridging the great disconnect will require
8、 concerted efforts by investment firms,companies,and standards setters.The investment industry needs to translateleaders sustainability commitments more directly into day-to-day investmentdecision making.Companies need to give investors clear and compelling evidenceof the expected benefits of their
9、sustainability effortsincluding their long-termfinancial returns.Standards for transparent and consistent sustainability reportingwill enable investors and companies to close the gaps between ambition,investment,and value creation.Sustainable Investing Startsand Oen Staysat theTop 2022 Boston Consul
10、ting Group3Over the past five years,sustainability issues have become importantconsiderations across the investment industry.(See“Adoption of Sustainable-Investing Practices Accelerates.”)Advocates of sustainable investing,such asBlackRock CEO Larry Fink,regard it as a way for investment firms to pr
11、omote theirclients interests by limiting risks and capturing long-term growth and profitopportunities.A shi toward sustainable investing is evident across the investing industry.Among investment institutions that report using at least one sustainable-investing methodology,assets under management(AuM
12、)have increased ata CAGR of 16%since 2014,compared with a CAGR of 10%for all AuMglobally.Today,such institutions hold approximately 50%of the total AuMglobally.By 2030,BCG forecasts that their AuM will represent up toapproximately 82%of the worldwide total.(See the exhibit.)The accelerating adoption
13、 of sustainable-investing practices reflects animportant tipping point in the investing industry,as asset ownerssuch asADOPTION OF SUSTAINABLE-INVESTING PRACTICESACCELERATES 2022 Boston Consulting Group4pension funds and insurance companiesincreasingly requirecommitments to sustainability.As a resul
14、t,most investment firms also takean active stance on sustainability with the companies they invest in.Overthe past several years,we have seen the number and size of ESGengagement and stewardship teams increase substantially across theinvestment industry.Even more visibly,activist investors have made
15、 sustainability-relateddemands part of their repertoireand even the core of campaigns.Aprominent example is the success of Engine No.1,a small climate-focusedhedge fund,in electing three members to the board of ExxonMobil.Still,it appears that ESG commitments have not yet led to a broad-basedsurge i
16、n truly sustainable investments.Although most investment firmshave adopted some form of sustainable-investing practices,these are oenlimited to“negative screening”strategies that prohibit investing in certainsectors or companies.More advanced sustainable-investing strategies focuson“ESG integration”
17、(actively incorporating forward-looking ESGopportunities and risks into investment decisions)or“impact investing”(targeting investments that promote sustainability and measuring andreporting the impact).Indeed,BCGs analysis found that less than 5%of all mutual funds arecurrently classified as sustai
18、nable(based on Morningstars designation).This relatively low share follows Morningstars thorough assessment ofwhether funds bearing its sustainability label were truly investing insustainability.For example,in February 2022,Morningstar removed itssustainable designation from 1,200 funds with total A
19、uM of$1.4 trillion.Morningstars cleanup efforts are indicative of the oen unclear andmisleading definition of sustainable investments,which is furtherhighlighted by controversies surrounding exaggerated claims,or“greenwashing.”To improve the consistency and reliability of sustainabilitylabeling,the
20、US Securities and Exchange Commission has proposed rules toincrease the level of disclosure from investment funds and advisors thatmarket themselves as having an ESG focus.2022 Boston Consulting Group5However,the investing industrys strong emphasis on sustainability has nottrickled down to day-to-da
21、y investment decisions by mainstream investors(asopposed to those who are specifically focused on sustainability).Over the pastseveral years,the findings of BCGs Investor Pulse Check series and GlobalInvestor Survey,as well as investor interviews,have suggested that most portfoliomanagers and analys
22、ts do not make sustainability a prominent consideration.(See“About BCGs Investor Surveys and Interviews.”)BCG periodically conducts two surveys to understand investors views onequity markets and their priorities for shareholder value creation:In both surveys,participants are portfolio managers and s
23、enior analystsresponsible for making buy,sell,and hold decisions.They cover a broadspectrum of investor types and investment styles,including deep value,income,growth at a reasonable price(GARP),and core growth;they alsoinclude some quantitative,technical,and special situation investors.To gain deep
24、er insights into specific sustainability-related topics,BCG hasalso conducted several surveys targeting sustainability-focused investors aswell as asset managers more broadly.This article draws on insights fromthese surveys but does not present specific results.ABOUT BCGS INVESTOR SURVEYS AND INTERV
25、IEWS Global Investor Survey.We have conducted this survey annuallysince 2009.The current article addresses findings from the 2019 and2021 surveys,each of which comprised approximately 350 participants.Investor Pulse Check.Since March 2020,we have conducted frequentsurveys to help corporate executive
26、s and boards of directorsunderstand investor perspectives in todays rapidly changingenvironment.The current article addresses findings from the first 21surveysthe most recent of which was conducted in October 2022 andcomprised more than 3,000 participants.2022 Boston Consulting Group6Our analysis of
27、 all survey results is supported by interviews with more than4,000 investors and sell-side analysts on behalf of our clients.During thepast 12 to 24 months,sustainability has consistently been a topic in theseinterviews.Investors participating in the Pulse Check surveys have consistently givensustai
28、nability and other environmental,social,and governance(ESG)considerations a ranking of 13 through 17 out of 18 key investment criteria.Noindividual ESG consideration is ranked by more than 5%of respondents as a top-three investment criterion.This confirms that mainstream investors remainsquarely foc
29、used on financial metrics,especially revenue growth potential,valuation levels,and opportunities to grow profitability.Similarly,only 5%to 7%ofinvestors rank climate(and other environmental risks)among their top threemacro concerns.Investors assign much greater importance to traditional factorssuch
30、as inflation,macroeconomic and geopolitical risks,supply chain disruptions,and asset prices.Although there is ample evidence that investors want healthy companies tomaintain their ESG commitments,our survey respondents are not givingmaterially greater consideration to ESG in their day-to-day decisio
31、ns.In fact,anincreasing number admit to not considering it at all.Among respondents in our2021 global investor survey,46%said that they actively consider ESGonly a 2percentage point increase from 2019.In the same survey,33%of respondents saidthey do not consider ESGa 9 percentage point increase from
32、 2019.The growing share of respondents who do not actively consider ESG points to howsustainable investing has become an increasingly divisive topicwith a backlashevident in political debate and the media,as well as from anti-ESG activistinvestors.Not surprisingly,there is more consensus among inves
33、tors on theimportance of traditional governance criteria than on that of environmental orsocial agendas.(See Exhibit 1.)2022 Boston Consulting Group7Our interviews with more than 100 investors conducted over the past year paint asimilar picture.Interviewees consider sustainability predominantly in t
34、erms of risk,and they avoid or sell stocks carrying material sustainability concerns.Beyondthat,sustainability is not a key investment consideration.All these observations suggest that the investing industrys commitments tosustainability are disconnected from day-to-day investment decisions,whichrem
35、ain laser focused on financial and shareholder returns.This raises a criticalquestion:Why have investors not walked the walk by incorporating sustainabilitymore firmly and consistently into their decision making?Interrelated Challenges Underlie the Great DisconnectOur findings indicate that the chal
36、lenges to sustainable investing addressed in ourprevious research still exist.The disconnect between institutional sustainabilitycommitments and day-to-day investing practices,in particular,is the result of threeinterrelated challenges:a lack of incentives and quantification,unclear financialbenefit
37、s,and inconsistent reporting and data.2022 Boston Consulting Group8Lack of Incentives and Quantification.Asset managers investing practices,andthe underlying incentives,have traditionally focused on short-to medium-terminvestment returns.So far,only about half of all investing institutions includesu
38、stainability in their incentive systems,and an even smaller share measure theirsustainability footprint.In our interviews with managers and analysts who make day-to-day investmentdecisions,we observed a“check the box”mindset.These investors abide bycorporate guidelines(requiring minimum ESG scores,f
39、or example,or excludingcertain sectors,such as tobacco or oil and gas).But sustainability plays no furtherrole in their investment theses,which are focused on expected financialperformance,valuation upsides,and capital allocation.Unclear Financial Benefits.When asked about the most important challen
40、ge tomaking sustainability a more prominent investment consideration,67%ofportfolio managers and analysts highlighted concern about whether this conflictswith a companys financial performance or provides clear economic benefits.(SeeExhibit 2,le side.)This indicates that investors want companies to l
41、ook atsustainability not in isolation but as part of their business strategy and capitalallocation.In other words,they expect sustainability to translate into strongerfinancial performance and TSR,but not to be an end in itself.2022 Boston Consulting Group9Investors also want companies to help them
42、make more explicit connectionsbetween sustainability and value creationthat is,how sustainability creates orstrengthens competitive advantage or business resilience.Although companieshave made strides in integrating their ESG and business strategies,less than 50%ofinvestors believe that these strate
43、gies are well aligned.Additionally,only 40%saythat companies are doing a good job at communicating their ESG objectives,strategies,and initiatives.(See Exhibit 2,right side.)Inconsistent Reporting and Data.ESG professionals have long highlighted thelack of consistent sustainability reporting standar
44、ds and readily available data.Indeed,only one-third of investors report that they use dedicated ESG data in theirinvestment decisions and recommendations.(See Exhibit 2,right side.)That is,investors are unable to incorporate sustainability performance into theirinvestment decisions because they cann
45、ot effectively measure and connect it toexpectations for financial performance and value creation.As a result,companiesare making strategic sustainability decisions and investments without anyreassurance that key stakeholders will reward their efforts.2022 Boston Consulting Group10Three Imperatives
46、to Bridge the GapSustainability,especially decarbonization,will create winners and losers across andwithin many industries.So its a matter of when,not if,sustainability initiativeswill translate into tangible financial results for shareholders.Investment firms,companies,and standards setters all hav
47、e a role to play in removing the obstaclesto making sustainable investing more mainstream and a more powerful engine forsustainable value creation.1.EMBEDDING SUSTAINABILITY IN DAY-TO-DAY DECISION MAKINGAsset owners are continuing to increase their demand for ESG-focused investmentproducts.This will
48、 motivate investment firms to further shi their focus towardlonger-term,sustainable value creation and to make the required organizationaland cultural changes.To realize their ambitions,these firms must translate institutional sustainabilitycommitments into day-to-day investment decisions and embed
49、sustainability morefully into their toolkits and incentives.Success requires a more comprehensiveapproach that moves far beyond negative screening,which remains the mostcommon method.Private equity firmswith their full control of and transparentreporting on portfolio companiescan serve as role model
50、s for public investors.2.INTEGRATING SUSTAINABILITY AND VALUE CREATIONIts a matter of when,not if,sustainability initiativeswill translate into tangible financial results forshareholders.2022 Boston Consulting Group11Companies need to better understand and articulate the business cases forsimultaneo
51、usly targeting sustainability and financial returns.They must take threeessential actions:In our experience,companies that understand and articulate the economic case forsustainability can garner strong investor support and translate these investmentsinto value creation.For example,in October 2021,D
52、ow Chemical announced acomprehensive sustainability strategy to achieve carbon neutrality by 2050.Inaddition to pursuing initiatives such as plastic circularity and bio-plastics,Dowcommitted to investing$1 billion annually to decarbonize its plants,includingconstruction of the worlds first carbon-ne
53、utral ethylene cracker.Since the initialannouncement,Dow has reinforced its messaging by highlighting the long-termEBITDA potential and the expected return on capital,while also sharing keymilestones and medium-term financial targets.Over the eight months followingthe announcement,the companys TSR c
54、learly outperformed the average of itspeers.Apply a value creation lens to sustainability that considers its impact onlonger-term growth,profitability,and valuation,as well as the capital spendingrequired.Companies need a tailored capital allocation approach that ensuresattractive returns on investm
55、ents without stifling green initiatives.Similarly,portfolio decisionsincluding assessment of acquisition targetsshouldexplicitly incorporate climate and sustainability considerations.Provide clear and compelling investor communications that highlightsustainabilitys role in the companys investment th
56、esisincluding expectedfinancial returns and risk implications relevant to investors.Establish capabilities to track and manage the companys sustainabilityfootprint,including carbon accounting and pricing,and to integrate therelated insights into strategic decision making and sustainability reporting
57、.2022 Boston Consulting Group12Despite such encouraging examples,the market will not immediately reward allinvestments in sustainability,especially if they initially are subscale,overshadowedby other developments,or last beyond typical holding periods.(See“DoesSustainability Affect Company Valuation
58、s?”)To be prepared,companies need tothoughtfully assess the long-term strategic and financial benefits of theirsustainability efforts relative to their costs and investment needs.And they mustunderstand the importance of sustainability overall and of specific components,such as carbon emissions,for
59、investors in their sector.Although there is some evidence that sustainability can affect valuations,its too early to declare that capital markets reliably value sustainability.Inour client work,for example,aer accounting for differences in companiesbusiness models and financial profiles,we find a st
60、atistically significantrelationship in only a few industries or sectors.This lack of consistent evidence likely reflects investors requirement thatsustainability meet several criteria in order to be valued:Companies need to thoughtfully assess the long-termstrategic and financial benefits of their s
61、ustainabilityefforts relative to their costs and investment needs.DOES SUSTAINABILITY AFFECT COMPANY VALUATIONS?Its impact must be incremental.More than 80%of differences invaluation multiples can be explained by differences in business models,financial profiles,and capital market conditions.For sus
62、tainability totruly have a valuation impact,it must meet the high bar of adding tothe positive impact of these factors.That is,growing revenues and 2022 Boston Consulting Group13profits by investing in sustainability is not sufficient.Investors alsoneed to value each incremental dollar of sustainabl
63、e revenue or profitmore highly.Its impact must be material.The economic importance ofsustainability and its specific components may vary substantially acrossdifferent sectors.For example,a tax of$100 per ton on carbonemissions would reduce company profits by 10%or more in a handfulof industries but
64、in others would barely have any impact.(See theexhibit.)Not surprisingly,those industries in which carbon taxeswould have a more meaningful impact on profitability are also theones in which low emitters tend to have higher valuation multiples.Its impact must be causal.Even when companies that aresus
65、tainability leaders have premium valuations,the question oenremains:Which is the hen and which is the egg?Althoughsustainability could promote higher valuations,the correlation couldalso be due to the fact that higher-valued companies with strongerbusiness models have the resources and freedom to in
66、vest insustainability.It will be important to closely monitor how suchpatterns evolve over time.2022 Boston Consulting Group14Encouragingly,there is reason to believe that the link betweensustainability and valuations will become stronger and more consistent.Ina BCG investor survey focused on carbon
67、-emitting industries,only abouthalf of respondentsranging from around 40%in transportation to 67%inpower production and utilityreported that climate leaders currentlyreceive a valuation premium.However,more than three-quarters ofrespondents said they expect climate leadership to translate into premi
68、umvaluations by 2030.2022 Boston Consulting Group153.IMPROVING THE CLARITY AND CONSISTENCY OF SUSTAINABILITYREPORTINGFinally,investors and companies will benefit from better and more consistentsustainability reporting.Standards settersincluding the InternationalSustainability Standards Boardhave com
69、mitted to rapidly developing and rollingout standards.The European Union has taken a leading role by mandating certaindisclosures starting in January 2023.As a result,we expect firmer guidelines,moreadvanced requirements,and expanded regional coverage in each year goingforward.While public equity ma
70、rkets are waiting for consistent sustainability standards toemerge,private equity investors have already taken on similar reportingchallenges.Early insights from such pilots highlight the importance of a focused setof key metrics that enable investors and corporate leaders to prioritize their effort
71、s.Of course,this may present new challenges,since any new reporting standards willalmost certainly be extensive and complex.Fostering a Virtuous CircleAlthough all the various stakeholders will need to do their parts,the pivotal role inmeeting the challenges of sustainable investing will be played b
72、y companiesthemselves.Corporate leaders have an opportunity to build a virtuous circle thatstarts and ends with fully integrating sustainability into corporate strategies andinvestment theses.Doing so involves several steps:Identifying and targeting sustainability-driven shis in profit pools Assessi
73、ng sustainability-related portfolio risks and opportunities,including therole of M&A in sustainability Understanding investor perspectives and the implications for valuation Taking a leading role in sustainability reporting and communications 2022 Boston Consulting Group16These steps will enable com
74、panies to determine and articulate how sustainabilitystrategies can deliver longer-term advantages and financial returns.Clear upsidesand messaging,in turn,will increase the likelihood that investors will rewardcompanies with stronger valuations and stock performance.Finally,if corporateleaders know
75、 that capital markets will appropriately value sustainabilityperformance,they will gain the confidence needed to reinforce their sustainabilitycommitments and mobilize their organizations around sustainability ambitions.The authors thank their colleagues Alexis Colombo,Michael Demyttenaere,BoryanaHi
76、ntermair,Ryan McKenzie,Michael McLaughlin,Rachna Sachdev,and Hardik Sheth forcontributions to this article.Assigning clear responsibilities for the sustainable value creation journey,including a leadership role for the CFO,whose organization is uniquelyequipped to make the connection between sustain
77、ability and value creation 2022 Boston Consulting Group17AuthorsJody FoldesyManaging Director&Senior PartnerLos AngelesGerry HansellManaging Director&Senior PartnerChicagoJeff KotzenManaging Director&Senior PartnerNew JerseyJesper NielsenManaging Director&Senior PartnerLondonAlexander RoosManaging D
78、irector&Senior Partner;Global Co-Leader,Center for CFO ExcellenceBerlinDouglas BealPartner&Director,Sustainable Investing&Social ImpactNew YorkHady FaragPartner&Associate DirectorNew YorkABOUT BOSTON CONSULTING GROUP 2022 Boston Consulting Group18Boston Consulting Group partners with leaders in busi
79、ness and society to tackle theirmost important challenges and capture their greatest opportunities.BCG was thepioneer in business strategy when it was founded in 1963.Today,we work closely withclients to embrace a transformational approach aimed at benefiting all stakeholdersempowering organizations
80、 to grow,build sustainable competitive advantage,and drivepositive societal impact.Our diverse,global teams bring deep industry and functional expertise and a range ofperspectives that question the status quo and spark change.BCG delivers solutionsthrough leading-edge management consulting,technolog
81、y and design,and corporateand digital ventures.We work in a uniquely collaborative model across the firm andthroughout all levels of the client organization,fueled by the goal of helping our clientsthrive and enabling them to make the world a better place.Boston Consulting Group 2022.All rights reserved.For information or permission to reprint,please contact BCG at .To find the latest BCG content and register to receive e-alerts on this topic or others,please visit .Follow Boston Consulting Group on Facebook and Twitter.