Insight & Analysis

Companies that integrate ESG reap investor benefits

Published: Dec 2021

As investors pile on the ESG pressure, companies integrating sustainability are benefiting with favourable financing costs. Corporate finance and treasury teams’ conversations with ESG-focused shareholders are easier if they have a firm grip on what ESG issues are most material to their business.

Hands holding cogs

Companies that have strong sustainability stories can reap investor benefits. Research from ratings agency MSCI shows that across both debt and equities, advanced and emerging economies, companies with higher ESG ratings have a lower cost of capital by up to 40 basis points. “The relationship between ESG scores and the cost of capital was the strongest in the US, where the lowest-ESG-scored companies faced significantly higher cost of capital than the highest-ESG-scored companies,” said Ashish Lodh, Vice President, MSCI Research. “In Europe and Japan, the relationship was not entirely consistent, although the cost of capital for the lowest-rated companies remained significantly higher than for the best-rated ones.” Elsewhere, research by Aegon Asset Management finds that companies in the most polluting industries have shrinking investor bases.

When German logistics giant Deutsche Post DHL Group published its accelerated roadmap to decarbonisation in March this year, it saw a significant rise in its share price, said Adam Pradela, Executive Vice President Corporate Accounting & Controlling and Klaus Hufschlag, Senior Vice President CREST Finance Business Intelligence & Analytics in an interview with Treasury Today.

“Importantly, our stock price went up at the same time as we announced plans to spend €7bn on sustainability by 2030 – the world of investment is going in this direction. Investors appreciate what we are doing.” The company has cut carbon emissions by 37% since it started its CO2 reduction programme, and carbon is now the most relevant KPI for the company’s investors, they said.

“There are a couple of risks posed by not working with investors,” says Madeleine Szeluch, ESG Director, Investor Relations at Novartis, speaking from the pharmaceutical group’s Basel headquarters. “The first risk is that not engaging with shareholders could be reflected in a lower share price in the long term for corporates. Secondly, investors could divest in favour of companies that prioritise sustainability, thus resulting in corporates losing out on a growing segment of sustainability-minded investors.”

Materiality

Novartis was the first pharmaceutical company to hold an ESG Investor Teleconference in 2014, now grown into an annual ESG Day for investors with the CEO, Vasant Narasimhan. “We wanted to create an opportunity and a platform for engagement between our senior management and investors on issues that have been increasing in importance for a number of years, both for us as a company and our investors,” says Szeluch, one of two full-time ESG directors sitting within the investor relations team.

For treasury and finance teams wondering where to begin improving their ESG dialogue with investors, Szeluch suggests a good place to start. Novartis’s Materiality Analysis is central to its approach to ESG and involves a process that allows all stakeholders, including investors, to contribute to the most material risks that define the company’s value creation potential ahead. “We conduct our Materiality Analysis every four years, engaging with several thousand internal and external stakeholders to identify the most critical areas that we want to focus on from an ESG perspective.” The most recent analysis revealed patient health and safety, access to health care, innovation, and ethical business practices as the most material.

The fruits of the analysis were evident in investor enthusiasm for the company’s first sustainability linked bond last year, structured so that bondholders receive a higher interest if Novartis fails to meet targets around expanding access to innovative medicines. “We were encouraged by the strong investor feedback that we received. Our SLB was recognised as innovative and industry leading.” She adds that Novartis’s commitment to being carbon, plastic, and water neutral by 2030 has also been “very positively received by investors.”

Similarly, corporate finance and treasury teams’ conversation with ESG-focused shareholders will be much easier if they have a firm grip on what ESG issues are most material to their business. By identifying just a couple of the most material around energy use, supply chain management or how a product is made, corporates can get back in control of the narrative, guide investors on what matters most and position the company in the market, allowing the investor story to flow.

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