Sunday Brunch: Sustainability disclosures matter for traditional investors as well

"ESG doesn't need a specialized term, as that implies it's niche. Considering long-term factors isn't ESG investing; it's investing". Alex Edmans - The end of ESG December 2022

When I talk with many investors about sustainability disclosures, one common response is "my ESG team deals with that". But is that really the right approach?

No portfolio manager I know says 'I don't care about what the company discloses about its strategy' and they certainly don't say 'I am not worried about future capex and cashflows'. I argue that they should treat sustainability disclosures in the same way. To paraphrase the Alex Edmans quote above ...'sustainability is investing'.

So why might sustainability disclosures get treated differently by investors? One reason might be that companies mostly disclose alignment with the Paris Agreement, often via long term targets. And they frequently provide limited detail around what concrete actions they plan to take, and what the financial implications might be of the choices they have made. So, it can feel more of a values issue (ie ethics) than a financial one.

But the sustainability transitions will have financial implications. And, if investors and shareholders are not getting the information they need to make good investing decisions, the solution is not to 'look the other way'. Surely it's to insist on better disclosure?

And this applies to traditional investors, as much as it does to those who focus on sustainability.

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Sustainability disclosures matter for traditional investors as well

It's pretty obvious that sustainability focused investors care about a company's sustainability disclosures. But what about everyone else?

To me, as an ex-portfolio manager, the answer to that question is clearly yes. All investors should care about sustainability related disclosures.

There are two reasons why I think this. The first starts with the understanding that the sustainability transitions, including the move to Net Zero, are going to happen. You can argue about the pace of change. And you might argue about who pays. But it's going to happen.

This means that companies need to anticipate and prepare. As investors, we need to understand what concrete actions the company plans to take. And the financial implications that they will have.

As Alex Edmans said "considering long-term factors isn't ESG investing; it's investing". And the sustainability transitions are a clear example of a long term investing factor.