A Sustainable Outlook on Financial Futures

Environmental, social, and governance (ESG) has become a buzzword and subject of boardroom discussions at many organizations. Last month, the United States Securities and Exchange Commission (SEC) adopted, and subsequently voluntarily stayed, new regulations around climate disclosure, further catapulting the topic into public discourse. 

While debate has continued in the public eye, a team from The Fletcher School and Deloitte Global Services Limited sought to understand the role that sustainability plays in the market in a meaningful way. The Institute for Business in the Global Context (IBGC) at Fletcher and Deloitte collaborated to research institutional investor trust in sustainability data in the U.S. and globally. 

“One of the driving questions for us was to try and understand whether the sustainability and ESG credentials of a firm helped drive capital to that firm,” said Dean of Global Business Bhaskar Chakravorti. 

However, as ESG has emerged as a business priority for many organizations, there remains a significant question for investors and consumers: how to measure and, therefore, trust the commitments these organizations say they are making. 

“The topic of trust as a key area of inquiry emerged a couple of years ago when Deloitte executives realized that there's something fundamentally shifting in business and society,” said Kate Graeff F14, Vice President of Enterprise Trust at Deloitte & Touche LLP. “Regardless of which sector you look at, trust seems to be at a deficit.”

Trust, as Deloitte defines it, is the outcome of high competence and positive intent. 

“That basically means making and keeping good promises,” said Graeff. “It's demonstrating the capability and reliability to deliver on your commitments while also being humane and transparent in the way the organization operates.”

Several studies by Deloitte as well as other organizations point to fractures of trust. For example, the Organization for Economic Co-operation and Development (OECD) found that 40% of citizens distrust their national government. In the technology industry, Deloitte found that fewer than 40% of customers trust tech brands to display competence and good intent.

Blending Qualitative and Quantitative Methods

To decipher trust in ESG, IBGC and Deloitte developed a study that blended quantitative and qualitative methodologies. 

“We wanted to figure out if investors are using sustainability information when they're choosing whether or not to invest, and what information they trust most,” said Graeff. “We chose to work with The Fletcher School because of their global viewpoint and how closely Fletcher looks at sustainable and inclusive business.” 

“Together, we launched a research project to look at how asset owners from family offices, pension funds, and sovereign wealth funds, investment advisers, and asset managers assess ESG information to make decisions,” she added.

The team began by interviewing investors about how they evaluate different companies’ ESG metrics. Using the qualitative data from these interviews, the team developed a survey, which asked 1,000 respondents across North America, Europe, and Asia about what kinds of metrics they rely on in making investment decisions and the importance of ESG factors in their process. 

“The question was whether investors take into consideration the fact that these companies are paying particular attention to issues of environmental stewardship, social equity, and a variety of other societal needs, and whether they practice principles of good governance,” said Chakravorti. “If we believe that these issues matter to investors, then a next natural question is what kinds of measures, metrics, and principles investors use to figure out whether a company is taking ESG seriously and is practicing it in a consistent and authentic way.” 

A Maturation of the Market

The findings of the study were significant and conveyed that investor concern around ESG isn’t a matter for the future — it’s here now. 83% of surveyed institutional investors globally incorporate sustainability information into their analyses. 

“One of our interviewees told us that some companies still look at sustainability as a marketing effort, but investors view it as a critical point in due diligence,” said Graeff. “They're pairing financial indicators with sustainability information to determine the risk profile of the organization. What is the governance structure behind their sustainability strategies, what outcomes are being achieved, and how is their strategy positioned to succeed in the future?” 

“We're seeing a maturation of the market,” she added. “Many organizations have started to embed sustainability as part of their overall strategy, and investors are taking an interest.”

Graeff pointed to how commitment to sustainability drives an organization’s risk profile, which is an important element of developing investor trust, customer loyalty, and employee engagement. Several organizations have created a chief sustainability officer, codified their sustainability governance processes, and established targets they report on periodically. In light of the SEC’s new disclosure rules, as well as EU’s Corporate Sustainability Reporting Directive (CSRD), universal reporting standards could make it easier for investors to compare organizations’ sustainability commitments, given that currently investors rely on their own or third-party metrics to trust that organizations are making good on their commitments.   

Beyond sustainability, Graeff noted that trust is becoming critically important in several areas, from protecting consumer data to the employee experience and use of AI. Among the report’s numerous findings, the team found that investors are sending a clear message to organizations. 

“People are becoming much more aware of the fact that for companies to maintain a consistent competitive advantage in the market over the long term, they need to be responsible stewards of the environment and the markets and communities in which they operate,” said Chakravorti. “It’s not just a good thing to do for society at large, but it's also good from the perspective of taking a long-term view of business.”

“Most investors see investment in these areas as a signal of management taking a longer view of the company, its markets, and its strategy,” he added. “They see it as a marker for adult behavior on the part of company management, as opposed to pursuing short term hits.”

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