Abby Joseph Cohen

It's important for companies to monitor, measure and manage their sustainability performance for their own purposes, but also because shareholders are increasingly asking them to do so. Social responsibility may not yet be the dominant investment model, but an increasing number of fund managers and institutional investors are paying attention to these issues.

For many years, the socially responsible investing (SRI) movement was stymied by studies that showed lower rates of portfolio returns for those that used sustainability or another SRI metric as their primary investing criterion. Until relatively recently, it was difficult to show a positive correlation between good corporate stewardship and strong financial market performance. Perhaps this was linked in part to the focus of early adopters of SRI to simply avoid certain companies and industries. Another contributing factor was the relatively small amount of portfolio assets that was targeted toward companies with strong records in SRI performance.

More recently, SRI has been broadened to include environmental, sustainability and governance (ESG) issues. Importantly, ESG investors are seeking to identify the companies that are strong performers in these categories rather than merely avoiding those in challenged industries. Data from the Investor Network on Climate Risk (INCR) – a network of investors that say they care about the environment – show a fascinating trend. As recently as 2003, the INCR represented investors with about $600 billion in assets under management. Today, the INCR has grown to an estimated $8 trillion network. Even when compared to the size of global capital markets, this is substantial and has reached critical mass.

One problem for investors interested in sustainability issues is that much of the publicly available information is not as useful as it could be. Moreover, there is often little consistency or comparability in the data offered by different companies. A sustainability issue that may be extremely relevant for one industry may not matter at all for another. Although the US Securities and Exchange Commission recently mandated corporate disclosures related to climate change, full details on the specific nature and form of disclosures must still be decided.

Investors are accustomed to evaluating companies using quantified financial data. We know how earnings, balance sheet and other items are defined because of clear guidelines such as Generally Accepted Accounting Standards (GAAP). But that level of specificity does not yet exist for the measurements related to sustainability. Many portfolio managers simply aren't sure what benchmarks and metrics to use.

From my viewpoint, however, one especially important benchmark is governance. Not surprisingly, there's a very high correlation between companies that score well on governance issues, and those that score well on sustainability, climate stewardship and community engagement.

Early on in the sustainability movement, investors – particularly large public pension funds – were driving the reporting process for companies. Their emphasis was largely on liability management, with the primary goal of avoiding bad long-term outcomes associated with corporate activities, such as the costs of environmental damage and remediation. There are two changes of consequence. First, investors are increasingly rewarding not only the avoidance of bad outcomes but also the pursuit of new business opportunities that enhance sustainability. These include developing new sources of revenues based on products and processes that have a friendlier environmental footprint. Second, more mainstream investors recognize that they can improve their financial returns by focusing on companies that prioritize sustainability. The results may prove to be mutually reinforcing, with companies responding to shareholders and shareholders responding to the successes of companies.

Bill Ford introduced sustainability reports for the vehicle manufacturer more than a decade ago, so Ford has a culture of paying attention to these issues. The credibility of Ford's effort is enhanced because the company's environmental policies are part of the overall business strategy. Sustainability can't be an add-on; it must be well integrated into a corporation's regular business activities.