Three Pillars of Value

The New Priorities for Sustainability Teams

Here’s a quick summary of what the three pillars of value mean for the sustainability team’s priorities.

Gear up. It’s time to learn about finance, capital budgeting, data operations and compliance. Sustainability is coming out of its silo. Get the skills of a normal cross-functional business team.

Focus on quantifiable impact. For example, use granular and fresh sustainability data to identify locales and projects that secure low-cost energy.

Think outside in. Talk to investor relations and external company analysts. See how they use your sustainability reports and data sets. Then improve your data to increase the size of the investor pool.

Race towards AI. Demonstrate how sustainability data fits into the enterprise AI trajectory. Don’t get left behind as the rest of your company turns it attention to AI.

And keep on reporting. Your customers and investors will demand it. Reporting software can make this job much easier. Create a data and reporting framework that goes deeper and wider each year

See our collection of resources for sustainability teams: Build the Business Case for Change

#2 Investor Demands

Investors can make money from sustainability data. And financial market data providers are feeding this demand, making money from providing useful streams of sustainability data. Companies that don’t tell their own data-driven story will find that investors fill in a narrative that assumes the worst. Meet the investor need for accurate, verified sustainability data and increase your pool of investors, access to capital and the value of your company. Data seldom has this much impact. Seize the moment!

Three facts drive investor demand for sustainability data.

A. The cost of climate change is here.
B. Corporate sustainability data is widely available to investors
C. Investors can make money from climate change through the reported data

A. The Cost of Climate Change is Here

The map below illustrates some of the cost of climate change, showing every event in the U.S. with $1B or more in losses. The number of such events has increased by 300% in recent years. And look where the icons are clustered, in the U.S. heartland. The cost of climate change is hitting Iowa and Kansas, not just Houston and Miami. As recent headlines show, a disaster is followed by increased costs of insurance for homes, businesses and autos, inflationary spikes in construction costs, rising housing costs, and huge infrastructure repair programs. It takes years to recover. Investors watch this economic disruption and invest accordingly.

B. Corporate Sustainability Data Is Widely Available to Investors

While most sustainability teams have caught the message, “build the business case for change”, many have not yet heard an equally important message, “investors see and use everything you report.” This second message applies to any private companies too. The graph below shows how data in corporate reporting flows into the financial markets. Bloomberg and other financial market data services sell subscriptions to cleaned and structured sustainability data. In fact, Bloomberg terminals harmonize financial, sustainability, physical risk and environmental data for each company, and investors use AI and other tools to select companies for investment. The graph below shows two investor use cases, hedging out climate risk and selecting the best performer amongst peers. These are discussed in the next section.

The graph shows that the four data types (financial, sustainability, physical risk and environmental) all feed into a unified profile of the company. What is not widely recognized is that EU regulatory filings through the CSRD are passed to the NZDPU, which has data sharing agreement with Bloomberg. This applies to public and private companies. Similarly CDP filings flow into Bloomberg data services through a data sharing agreement.

For sustainability teams this means that all data is under strong scrutiny. AI tools don’t care where the data comes from, they simply use all the available data to make the best predictions of returns. And investors have found that sustainability data increases the accuracy of these predictions, so they are willing to pay Bloomberg and other financial data services for access to sustainability data. And don’t underestimate the coverage and speed. Public and private companies can report one month, and face investor questions the next. It’s a new world.

C. Investors Make Money from Sustainability Data

Investors take in the Bloomberg data and data from other sources and then use AI to refine their investment decisions. AI models – and investors – don’t categorize the data, they treat each company as a unified data profile. It’s all math, no politics. It’s all about making money. The change in U.S. presidents does not affect their needs.

Investors want to pick the best investment from a group of peers. Typically, investors have asset allocation mandates. For example, an investor might be required to hold 20–30% of all assets in the automotive sector. The investor wants to find the best investments within the sector. Lower energy and water use demonstrates less risk and lower costs, as does lower waste generated. These data may also signal proactive management, and that signal can be further amplified by a lower carbon-intensity of revenue. Companies also release their energy, water and emissions reduction plans to investors, again demonstrating proactive management, capital efficiency and pace of innovation and change.

Note that investors are not looking for specific “green companies”, such as a solar company that derives revenue from a technology that supports a climate change agenda. They are looking for the best-performing companies in a set of sector peers, where performance is measured by investor returns.

In the long run investors don’t want to hold carbon-intense stocks and assets, as these are seen as having a brittle, risky business model. These companies are expected to go through waves of consolidation, and not all will survive. As one investor puts it “no one wants to be left holding the bag of carbon (9).” To compensate for the slow and continual erosion of their value, carbon-intense companies may take actions to boost investor returns, such as stock buybacks or raising dividends. Of course this works in the short-run, but it simultaneously increases investor concerns about the long-run.

So in the short run, the best performing stocks may be more carbon-intense, but this is not a stable situation. Returns will shift to investments that are better equipped to survive and thrive in a world with climate change.

Investors want to hedge out climate risk. Eliminating macro economic climate risk from a portfolio of investments may sound quite ambitious as climate change is pervasive, but the data shows it can be done. A stream of academic research initiated by Nobel Prize winning economist Robert Engle shows how to form a portfolio by selecting two types of stocks (10). The first group of stocks rises in value when there is climate news and the second group falls in value with climate news. To hedge out climate risk, one holds a balanced portfolio that goes up and down in equal measure for each climate news event. Of course, the portfolio has to be constantly rebalanced to ensure minimal losses. Engle and others have shown how effective this hedge can be, and now it is now widely used.

Again, investors use the data available on the Bloomberg terminal and in other places, combine that with AI and select the financial instruments for their portfolio. Climate risk is not really just a single news event, such as “hurricane hits Florida”, it is a set of economic consequences. Here’s an example: n 2019 PG&E, the large electric and natural gas utility in California declared bankruptcy, in what The Wall Street Journal called “The First Climate Change Bankruptcy.” In 2017, before the fires, PG&E was worth $36B. In 2019, stock value was less than $3B, debt exceeded assets by $20B, the utility owed $30B in liabilities and faced another 750 lawsuits. Today, in 2024, customers still have a fee on each utility bill from the 2019 bankruptcy, as regulators passed some – but not all – of the cost of bankruptcy onto customers. And in 2019, Edison, the parent company of Southern California Edison which is another large electricity provider in California, experienced a 52% drop in stock price. It took over three years for the stock to regain its former value. (11). This is a complicated financial story with long-lived spillovers to other companies. Welcome to the ”cost of climate change.” Investors need all the data they can get!

Companies that cherry pick reporting, have disclosure errors or don’t report will not appeal to AI-powered investors. Company valuations rest on accurate, complete and reliable data that investors trust. They use it directly, and they use it as a signal of effective company management.

In Sum

With an automated sustainability data service, the sustainability team can leapfrog over legacy setups and deliver highly accurate, enriched sustainability data. When enriched with cross-functional metadata from ERP systems, finance and procurement, granular data on water, energy, waste and emissions is a window into the core of the company’s operations and potential efficiencies. With the incredibly rapid pace of improvement in AI, sustainability data acquires value far beyond its current use in reporting.

For sustainability managers, the action item is simple: Put sustainability at the heart of your company’s strategy by making accurate, enriched sustainability data available to your company’s enterprise AI. Sustainability teams that don’t take this step will find themselves further siloed and with less impact.

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