Engaging with the Investment Value Chain

To ensure that sustainability efforts and performance are integrated into investors’ valuation and risk analysis, companies should actively engage with all players in the investment value chain, including sell-side research analysts, credit rating agencies (CRAs), index and data providers, and activist investors.

Integration of the SDGs into a company’s valuation should start inside the company. However, there is also the necessity for independent valuation by sell-side analysts and credit rating agencies (CRAs). Companies have experienced a deepening integration of their valuation by sell-side analysts through increasingly quantitative-based valuation and the production of integrated sell-side reports. A few companies have also engaged CRAs with mixed results.
CFO Insight

Sell-Side Research Analysts

ESG factors are increasingly being incorporated into stock valuation and recommendations by sell-side research analysts, and ESG scores resulting from proprietary and nonproprietary assessments are beginning to impact company valuation.

Financial analysts are at various stages of ESG incorporation, and third-party ESG data is often used as a reference for in-house models. Therefore, regular proactive communication with analysts is critical to ensure that they understand a company’s impact thesis and the investments that support it. Communication is also key in establishing a link between a company’s SDG-aligned strategy and value creation for the company and its stakeholders.

Credit Rating Agencies

ESG integration is becoming increasingly transparent in credit rating agencies’ methodologies, both in impact evaluation and credit assessment,as well as in gauging ESG-associated risks.

The integration of SDGs into a company’s strategy for value creation is essential information that it needs to proactively communicate on a regular basis. It can provide more legitimacy when supported by audits and third-party verification.

Data and Index Providers

As exchange-traded funds (ETFs) and other passive investment solutions are becoming more and more relevant, with their share of total Assets Under Management (AUM) increasing globally, index providers are pivotal in their establishment of ESG/SDG indices based on ESG ratings data provided by third parties. Therefore, companies should work with ESG data and index providers to ensure the relevance and accuracy of third-party data related to their SDG impact.

Activist Investors and Investor Coalitions on Sustainability

Collaborative engagements with activist investors and investor coalitions on sustainability can be a powerful influence on companies’ SDG strategy and investments, highlighting the information that is relevant for investors on specific topics (e.g., climate change). This collaboration can help companies refocus their ambitions, targets, strategies, capital alignments, policies, governance, and reporting and can be an effective way forthem to test the validity of their SDG strategy.

Voluntary initiatives linked to investors can also prepare companies to face future policy changes more effectively. These include peer-to-peer continuous learning and improvement initiatives, which look at emerging practices from an investor’s perspective.