The majority of public companies will update their investment methodologies to include sustainability metrics as a key part of their return on investment (ROI) analysis by 2026, according to Gartner.
The shift from viewing sustainability solely as a source of risk management to a new driver of returns will be transformative for many companies.
Many organisations have evolved from a purely risk-oriented approach to environmental, social and governance (ESG) concerns and have begun to optimize their programs to burnish their reputation and actively attract customers, investors and talent. The next stage in this evolution is to drive sustainability transformation by making ROI a key focus of their ESG strategies.
“Many chief financial officers (CFOs) have already experienced positive returns from placing an emphasis on sustainability and through small-scale, green capital investments,” says Melanie O’Brien, vice-president analyst: research, in the Gartner Finance practice. “We predict that 60% of public companies will have updated their investment methodologies to include non-financial information related to sustainability by 2026, which will facilitate longer-term and transformative sustainability investments.”
O’Brien says traditional investment methodologies often overlook the value of nonfinancial and intangible benefits when considering investment returns. Progressive organisations that are embracing sustainability as a driver of returns have begun to update their investment criteria in a similar fashion to how leading organisations assess the non-tangible benefits of their digital investments.
Organisations that can account for the enterprise value of their sustainable investments, connect them to broader corporate strategy and show clear benefits to the organisation will likely be seen favourably by investors and other stakeholders.
Gartner recommends CFOs adjust their investment methodologies in key areas, including:
* Assessing their geographic portfolios for opportunities to divest businesses that conflict with stated ESG objectives; Gartner further predicts that 30% of multinational organisations will streamline geographies and subsidiaries due to sustainability regulatory requirements by 2026.
* Ensuring that investments which demonstrate clear nonfinancial but significant benefit to the organisation are considered equal to projects with financial returns.
* Tolerating a longer cash back period of six-to-10 years instead of the current two-to-three year period, aligned with strategic objectives and potentially by balancing longer term sustainability investments with additional more aggressive short-term investments.
* Leveraging current frameworks and accounting models that have been established to support the growth in organisations calculating the value on intangibles. These include the UN Value Driver Model, the Return on Sustainability Investment (ROSI) methodology, Economic Value Added (EVA) calculations and Value-Based Management (VBM).