Beyond box ticking – why investors and boards will benefit from strategic collaboration on sustainability
29 January 2025 - Collaborative support for legislative reforms, taxation frameworks, and public incentives is vital to create a level playing field for long-term value creation, says Gillian Secrett of the Cambridge Institute for Sustainability Leadership. First published by IPE.
Businesses and investors today face a world of conflicting realities. On one hand, governments are pursuing deregulation to spur economic growth, and markets compel businesses and investors to remain focused on bottom line results and short-term financial returns. On the other hand, the escalating costs of climate change, environmental degradation, resource competition and social instability are putting economies and financial value at risk.
Governments are under pressure to do what only governments can do, to address systemic economic and security risks, enabling an orderly market transition to achieve more stable, competitive and resilient economies. Meanwhile, any investor or company aiming to thrive over the next decade faces an imperative to manage portfolio risks, build resilience, support government efforts to create enabling market conditions for transition, and prepare to compete in more sustainable future markets.
Our recent report,“The rise and influence of investor stewardship,” produced in partnership with global law firm DLA Piper, maps how asset managers and company boards can most effectively work together to navigate this landscape. Our research shows that asset managers have a key role to play in shaping the actions of businesses they invest in, through aligning capital allocation and active stewardship.
Private board engagements can be particularly effective. For example, J.P Morgan Asset Management, in their 2022 Investment Stewardship Report, reported engagement with an American food and beverage corporation to address allegations of illegal land acquisition, environmental destruction and violence against local communities by a supplier. This resulted in the investee company screening all its supply chain according to the No Deforestation, No Peat, No Exploitation (NDPE) framework, thereby mitigating legal and reputational risks. Similarly, BlackRock in their 2024 Investment Stewardship Report, reported their engagement with a large mining company to address material climate risks while capitalizing on the projected doubling of copper demand driven by growth forecasts in renewable energy and battery storage.
For businesses, the evidence is clear that a box-ticking approach to sustainability reporting misses the point. A mindset that sees this purely as a compliance exercise, with no substantive engagement with the strategic implications - either to build resilience or to accelerate transition - leaves the business exposed to significant risk, misses major innovation and competitive positioning opportunities and may erode shareholder confidence. The growing costs and consequences of physical, transition and legal risks will increasingly focus the minds of investors. Boards should get ahead of this and shift from reactive reporting to taking a long-term view of the impact of environmental and social factors on financial value, and work to secure investor support for necessary adaptations to core strategies, leadership incentives, and capital allocation decisions.
Boards that engage with forward-thinking asset managers stand to gain significantly. By tapping into the market intelligence of investors attuned to systemic risks and opportunities, boards can enhance their strategic foresight and oversight capabilities, positioning their companies to deliver long-term value.
However, the challenge that many investors and boards alike face is that taking action now to protect long term value often puts a business or a portfolio at a short- term competitive disadvantage relative to those who aren’t taking action. Collaborative support for legislative reforms, taxation frameworks, and public incentives is vital to create a level playing field for long term value creation, and to create commercially viable pathways for businesses to transition out of harmful practices.
As Michael Sheren, formerly co-chair of the G20 Sustainable Finance Study Group and advisor to the Bank of England, writes: “Good stewardship is not just about holding companies and their boards accountable – it is also about actively empowering them and collaborating across the investment chain with stakeholders to create enabling market conditions for sustainability leadership."
To navigate this landscape and to support the companies they invest in to thrive, board members and asset managers will need to build their understanding of the current moment and may need new strategies, skills and capabilities to drive market shifts.
Ultimately in the face of failure to address these issues, it is individual savers, people who entrust their financial futures to investment institutions, who will pay the price for a lack of action by governments, to create market conditions to support the change required. By improving the collaboration between investors, asset managers, boards and legislators, the transition can be managed more effectively at pace.
First published by IPE (Investment Pensions Europe)