sustainability’s golden opportunity

Investors value ‘reducing or mitigating physical and transitional risks by threats to biodiversity’ (51%) and ‘winning business by demonstrating sustainability to clients and customers’ (47%) as opportunities for their portfolio companies and, above all, ‘improving access to talent by improving working practices and diversity and inclusion’ (55%).

Financial institutions have a role to play by engaging with their customers and investee companies. In a recent set of consultation papers, the Monetary Authority of Singapore (MAS) proposes a number of guidelines on transition planning for a net zero economy. Key expectations include engagement (rather than divestment) to steward transition planning in an orderly manner, an integrated approach to climate mitigation and adaptation measures and consideration of environmental risks beyond climate-related risks.

These developments underscore the significance of a balanced investment approach, stressing the importance of considering the interplay between climate and nature, along with potential trade-offs like environmental degradation resulting from climate solution pursuits. Given inherent trade-offs that may exist, engagement with firms encouraging sustainable practices may be more impactful than simply divesting. “Indiscriminate withdrawal of financing from companies in sectors which may cause more harm to the environment can have adverse consequences,” says Sonia Lim, partner in our financial markets practice, “as they may be the ones who need the financing to decarbonise.”11

Meanwhile, the extra attention to diversity reflects investors growing focus on the ‘G’ in ESG, says Cathryn Bean, partner in our employment practice. “They are increasingly concerned with the governance credentials of their portfolio companies, which can include reviewing arrangements for remuneration to ensure equal pay,” she explains.

Transparency will unlock investment

Investors also want businesses to embed sustainability into their strategies and not simply meet their minimum requirements, the survey shows.

Two-thirds agree that ‘businesses that actively contribute to a sustainable economy will perform better than those simply minimising their impact’. Seven in 10 say they ‘consider whether a company embeds sustainability into its business strategy’ when making investment decisions.

But their ability to make this assessment is blighted by data: 57% of investors say the diversity of sustainability data makes it challenging to assess companies’ ESG credentials.

Fortunately, work is under way to fix this. In June 2023, the International Sustainability Standards Board (ISSB) published its first two standards to promote global harmonisation on sustainability reporting. Moreover, in Europe, the Corporate Sustainability Reporting Directive (CSRD) will require in scope companies to adopt a common set of reporting standards tailored to EU policies. This promises to transform the ESG data ecosystem in Europe, says France Vassaux, partner in our financial markets practice. “We are expecting to see data for the whole ESG value chain from 2025, when companies will start reporting under the CSRD,” she explains.

Independent bodies such as the CDP are also widely recognised for their stringent and transparent environmental disclosure standards. “In areas such as renewable energy sourcing, the RE100 and CDP have developed detailed technical requirements that companies committing to being 100% renewable will have to meet” says Marc Fèvre, partner in our energy, natural resources and infrastructure practice.

Adopting these standards will help unlock the sustainability investment that businesses crave, says Turner. “Increased transparency and visibility of their sustainability activity helps ensure money is channelled towards sustainable activities.”

Seeing eye-to-eye on human rights

Businesses are not completely out of line with investors’ needs. Investors place a high value on human rights standards (Fig. 6), which are widely adopted by corporates: 57% of surveyed businesses have adopted human rights monitoring already, and a further 35% plan to do so in the next two years.

Investor interest in human rights stems in part from the EU’s Sustainable Finance Disclosures Regulation (SFDR) and EU Taxonomy regulation. To qualify as sustainable investments under SFDR, asset managers must make sure portfolio companies ‘do no significant harm’ to environmental or social objectives. Under SFDR, this includes screening against violations of the UN Global Compact and OECD Guidelines for Multinational Enterprises – both of which include human rights impacts.

“This is also reflected in the minimum safeguards that investors need to apply when identifying environmentally sustainable investments under the EU Taxonomy regulation,” says Derek Lawlor, partner in our financial institutions sector.

“International human rights are hardwired into the frameworks that firms have adopted to identify sustainable investments in compliance with the SFDR and the EU Taxonomy” says Robert Allen, partner in our disputes and investigations practice. “Having policies in place, as well as reporting on human rights impacts, is one of the things they expect from their portfolio companies.”

In other areas, businesses are taking the lead without prompting from investors. Only 20% of investors place adopting ‘Taskforce on Climate-related Financial Disclosures (TCFD) entity and product reporting’ among the most helpful actions by portfolio companies, even though reporting under the framework is mandatory in several countries, including for certain companies in the UK. Only 14% of executives say their organisation has already adopted this, but 58% plan to in the next one to two years.