Guest article by Tor W. Andreassen.
Customers are the company’s only natural source for funding. The mantra is quality-goods and services for money! Increasingly, customers are investors who invest in companies based on their sustainability goals. The emerging mantra is sustainability for money!!
Today it has become a truism that satisfied customers are loyal and that dissatisfied customers change patronage. In this way, customers send signals to leaders regarding perceived quality in delivered goods and services. Several managers are now experiencing that customers are also investors who demand more than just customer satisfaction. Sustainability or ESG – Environmental, Social, and Governance – is increasingly mentioned.
Tree reasons why private investors emphasize ESG in their investment decisions
1. First, 84 percent of investors want their investments to reflect their personal values and views on sustainability. They do it in two ways. Either by excluding companies or (index) funds that do not harmonize with their values or by investing in the best ESG companies or (index) funds that exist. Interestingly, in the role as value investor you will most likely find a 48-year-old female investor (Morgan Stanley, 2019).
2. Second, 86 percent of private investors believe that a weighting of their investments towards ESG companies will increase the return on investment. There are many indications that they are right. A juxtaposition of companies defined as ESG Leaders with similar ESG Laggards shows that the former portfolio outperforms the latter: nearly eight percent better over 156 months, according to MCSI ESG Research. In a review of 2000 investment studies, Friede, Busch, og Bassen (2015) found that in 90 percent of the cases, companies with a strong ESG profile had the same or better financial results compared to companies with a weaker ESG profile.
3. Third, investors feel strongly about their investments having a positive impact on world sustainability. This is especially true in four areas: reduction of plastic emissions (46 per cent), societal development (42 percent), climate change (46 percent), and more multicultural diversity (30 percent).
Getting ESG investments from customers
According to New York Life Investment, the importance of the ESG argument for people’s investments varies with age. In the age group 24 to 39 years, as many as 91 percent of the investors are concerned about ESG, 84 percent of those between 40 and 45 years are concerned about ESG, and 80 per cent of those over 55 years or older are concerned about ESG. Youngest investors being most concerned with ESG, is logical given that they are the ones who will have to deal with the sustainability problem as the consequences become more obvious to more people.
In Norway, 2020-data from the Norwegian Innovation Index at NHH shows that Stormberg – an outdoor active living company like Landsend in the USA – is ranked as number one in the area of social and sustainability innovations. What make them stand out is their inclusion of employees who have a whole in their CV or their products which include a cash-back when returned. Similarly, from the American Innovation Index, we know that IKEA in 2020 was ranking as number one in the same domain by their customers. IKEA will resell used products and changed their pricing from unit selling to also include ethe option of renting. Stormberg and IKEA are companies that would have been strong investment candidates by their customers and other private investors if they were listed on the Stock Exchange. Being seen as part of the solution rather than the problem, is increasingly important.
According to the research company Forrester (2020), 68 percent of American consumers say that a company’s social reputation influences their decision to buy their goods or services. From this we can learn that while quality in delivered goods and services used to be a necessary and sufficient condition for competing in the market, today leaders must also innovate and deliver on the ESG goals in order to compete for customers’ business and investors’ cash.
In conclusion, ESG laggards will find it increasingly difficult to retain and attract customers and they will increasingly struggle to obtain credit for their operations or loan for their expansion. Responsible production and consumption (Sustainability goal #12) are in all parties’ long-term interest. Unfortunately, this is an area where most companies have unfinished business, according to MSCI ESG Research. The good news is that consumers and investors will take the lead, nudged by authorities. Consumers as customers and investors have something firms crave: MONEY!
Tor W. Andreassen
Professor of Innovation at NHH Norwegian School of Economics
Director for the research center Digital Innovation for sustainable Growth
Image credit: Micheile Henderson.