The Price of Ignoring Sustainability
Strong investor statements were made by the investment community at last week’s International Sustainability Standards Board (ISSB) symposium, with Fiona Bassett, CEO of FTSE Russell, An LSEG Business, introducing the term "sustainable market caps.”
With the urgent need to price risk and opportunity more accurately, investors emphasized to issuers and preparers that the disclosure of sustainable business models leads to value creation.
It was made clear that the investment community is moving toward and support the use of global standards as a baseline for comparability and capital allocation, and they are not waiting for regulators to make it mandatory. With $30.3 trillion invested globally in sustainable investing assets, the message conveyed was that company reports will be utilized, or proxy data will be used, to determine market capitalization.
Specifically, the concept of traditional market cap, which only considers financial metrics, is deemed outdated. Investors are now integrating sustainability performance, including targets and metrics, to assess resilience and alignment with socially responsible and environmentally sustainable business practices.
What could that formula look like?
Sustainability Market Cap = Financial Market Cap X Sustainability Factor
Financial Market Cap: This represents the traditional market capitalization calculated based solely on financial metrics, using the current market price per share and the total number of outstanding shares.
Sustainability Factor: A multiplier or adjustment factor reflecting the company's sustainability performance. This factor is derived from a thorough assessment of the company's sustainable business practices and can be assigned by rating agencies, investors, or other stakeholders.
Sustainability Market Cap: involves considering a company's market capitalization in the context of its sustainability performance and practices. While traditional market capitalization centers on financial metrics, a sustainability market cap incorporates sustainability-related risks and opportunities. This underscores the growing importance of sustainability-related risks and opportunities and how they can significantly impact a company's long-term value.
Also, a word of advice came from investors that was directed at companies on the hunt for capital. Take control of your sustainability story!
Neglecting this is likely to encourage investors to favor your more transparent rivals, limiting your options and potentially resulting in higher capital costs.
