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Alternative Investment industry believes sustainability reporting is increasingly important

Tuesday, June 12, 2018
Opalesque Industry Update - Sustainability continues to be a hot topic issue. From the Paris Climate Accord, to the sourcing of food or the treatment of the individuals involved in the production of goods, sustainability has become an increasingly prominent issue in global news and can directly impact consumers' perception of individual companies and, ultimately, a company's bottom line. As social media continues to highlight the extent of damage that can be done when a company's pollution of the environment or unethical treatment of employees or animals is placed under the microscope, investors are stepping up the importance they ascribe to sustainability reporting.

Though sustainability reporting is still in its early stages for most firms, heightened attention to the topic and efforts to enhance the consistency and quality of sustainability reports make it clear that the focus on sustainability isn't going away anytime soon. Given this reality, The New York Alternative Investment Roundtable recently sponsored the third day-long Sustainability Investment Leadership Conference (SILC), where attendees were surveyed about the topic.

"Regulation requires companies to report on some sustainability matters that they otherwise might not have reported on… but once companies start to focus on a sustainability matter, they tend to go well beyond the minimum compliance requirements," said Michael Littenberg, a partner at global law firm Ropes & Gray. Noting that regulation is not the only catalyst driving companies to enhance sustainability disclosure, however, he added: "pressure is coming from many areas, including from NGOs, peers, competitors, customers and even internal stakeholders."

One particular area of concern relates to sustainability reporting. This SILC event highlighted some of the risks related to the supply chain and the importance of companies being aware of and transparent about such risks. "In the past, you could have a problem somewhere in a factory or in the supply chain that wouldn't be brought to the public's attention, but today everything is immediate through social media and mainstream media. You can no longer just hide and hope it goes away," said Christian Frutiger, global head of public affairs for Nestlé S.A., commenting on the importance of companies being aware of any risks they are exposed to in their supply chains and actively managing such risks and sharing this information with investors. "Social media is a reality and it's here to stay," he said, noting that a lot of damage that can be done to a company's brand through social media controversies. Nonetheless, he believes the speed of social media provides a great opportunity to bring a brand's story to consumers, such as the positive impacts of sustainable sourcing on farming communities.

Roundtable members believe that sustainability reporting is becoming increasingly important for companies across the board, regardless of size or industry. 73% of respondents to this year's survey said that they believe sustainability reporting is equally important for all companies, compared with 70% of respondents in 2017, 65% of respondents in 2016 and 41% in 2015; while only 27% of respondents believe sustainability reporting is more important for large, international companies, compared with 30% in 2017, 35% in 2016 and 59% in 2015. "As issues related to sustainability are increasingly highlighted by the media and become a regular part of the conversation, the importance of sustainability reporting has moved to the forefront of investors' minds," said Adam Weinstein, President of the New York Alternative Investment Roundtable and a managing director at an alternative asset management firm. "Given the rising importance of sustainability to companies' bottom lines, The New York Alternative Investment Roundtable will maintain its dedication to examining the topic and promoting best practices in this area."

New York Alternative Investment Roundtable members had the opportunity to weigh in on this topic both at the SILC event, as well as through an online electronic poll.

*Of the respondents to this survey, 29% were fund managers; 17% were allocators; 23% were risk management or trading; 22% were service providers; and 9% were other industry participants.

Following are some of the key findings to this year's survey, compared with answers to the same questions in recent years:

  • Asked whether their firms consider whether or not companies practice sustainability reporting when choosing where to invest, 68% of respondents said they do, while 32% do not. Comparatively, when asked the same question in 2017, 51% of respondents said it is a factor in determining the companies they invest in, while 49% said it is not; and in 2016 54% of respondents said it is a factor, while 46% said it wasn't.
  • When asked whether sustainability reporting is worth the added costs and the additional time needed to produce such reports, 61% of respondents think it is, compared with 65% of respondents in 2017, 60% of respondents in 2016 and 46% of respondents in 2015; 35% of respondents said that they believe it is still too early to know whether investors will eventually hold it against companies that don't report on their sustainability efforts, compared with 32% of respondents in 2017, 31% of respondents in 2016 and 49% in 2015; and 4% think the focus on sustainability will be short lived and isn't worth the effort, compared with 3% in 2017, 9% in 2016 and 5% in 2015.
  • 73% of respondents said they believe sustainability reporting is equally important for all companies, compared with 70% of respondents in 2017, 65% of respondents in 2016 and 41% in 2015; while 27% believe it is far more important for large, international companies, compared with 30% in 2017, 35% in 2016 and 59% in 2015.
  • Asked if they believe sustainability reporting could ever become a common practice among companies without regulatory involvement, 40% of respondents think that companies may voluntarily produce reports, but that regulatory involvement will be necessary to ensure high quality reports and consistency, compared with 48% of respondents in 2017, 26% of respondents in 2016 and 30% of respondents in 2015; 22% think that sustainability can have a big enough impact on a company's ultimate profitability that companies have started to realize it is in their best interest to focus on the issue and produce reports, compared with 44% in 2017, 49% of respondents in 2016 and 46% in 2015; and 38% think that regulatory requirements are the only thing that could ever bring about market-wide reporting, compared with 8% in 2017, 25% of respondents in 2016 and 24% in 2015.
  • When asked if sustainability reporting is likely to become more or less important within the next decade, 48% of respondents said that investors are starting to put enough emphasis on such reports that companies that fail to generate sustainability reports risk the loss of investor support, compared with 51% of respondents in 2017, 43% of respondents in 2016 and 61% in 2015; % think there is still enough investor uncertainty about how such reports can translate to stronger long term performance for companies that it is still too early to know, compared with 22% of respondents in 2017, 20% of respondents in 2016 and 21% in 2015; 17% think sustainability reports will need to become more uniform and concise before they can become a critical factor in the companies that investors choose, compared with 22% in 2017, 33% of respondents in 2016 and 15% in 2015; and 9% think sustainability reporting is only a fad and won't gain long-term traction, compared with 5% of respondents in 2017, 4% of respondents in 2016 and 3% in 2015.
  • Asked whether their acceptance of sustainability would change if it focused more on things like building a company's reputation, health community involvement and good employee relations, versus environmental issues such as global warning, 39%% said there would be no change in their attitude toward sustainability, compared with 51% of respondents in 2017 and 46% of respondents in 2016; 48% said they would be more likely to embrace the concept, compared with 42% of respondents in 2017 and 45% of respondents in 2016; and 13% said they would be less likely to accept sustainability, compared with 7% in 2017 and 9% in 2016.

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