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Impact Investing

IPE special report May 2018

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Sustainability: smoke and mirrors

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Sustainability, in essence, is about employing your capital shrewdly and effectively, thinks Alex Malley, chief executive of the professional accounting body CPA Australia. And that is what determines an investment’s profitability, and risk of loss.

“If you have a good business plan and efficient use of resources, the share price will take care of itself over time,” Malley says.

Asian institutional investors have poor reputation for taking issues such as sustainability seriously. But that is not always deserved, according to CPA Australia research.

Malley’s perspective may well resonate with Asian investors’ pragmatism.

For example, investors in Hong Kong are more likely to use sustainability reporting to assess risk management, governance and company comparisons than investors in Australia, according to a survey by CPA Australia in 2008 and 2009.

The study polled the investment communities in Hong Kong, Australia and the UK, including pension fund trustees, institutional investors and asset managers. In Hong Kong, 30% of respondents said they use sustainability reports “a lot” to gauge companies’ risk management, compared with only 14.5% in Australia and 38% in the UK.

Similarly, 26% of Hong Kong respondents said they use sustainability reports “a lot” to assess governance, while 15% said so in Australia and 28% in the UK.

Asian investors are also more likely to put sustainability reports into practical use: 33%, or the largest proportion, of Hong Kong respondents said they used sustainability reports “a little” to structure socially responsible investment portfolios. And just under a third of those surveyed—again the largest proportion—said they used such reports to a similar extent for assessing environmental and social aspects of an investment.

Indeed, investors think that companies adopting sustainability reporting are motivated more by brand and reputation management than by stakeholder engagement and communication of non-financial details.

So if sustainability reporting is weighted towards appearances, how can investors get a reliable gauge of their risk of loss or probability of improved financial performance arising from non-financial factors?

Malley returns to the fundamental question: how efficiently is an investee using resources, which also indicates how effectively governed and managed a business is. He is also concerned that the financial crisis has shortened the investment horizon of investors in general. Indeed, large institutional investors began requiring two- or three-year instead of five-year performance during the financial crisis.

“Some investors want to see three-month returns,” Malley says. “That perpetuates a short-term mindset.  I would encourage investors to return to the long-term time frame of three to five years. Both boards and long-term investors should disassociate themselves from share prices.”

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