Content created by:
Boston Consultin Group
Alexis Colombo, Gerry Hansell, Jesper Nielsen, and Sam Farley
With so many companies investing behind their net-zero commitments—and half of all assets under management held by investors committed to sustainable investing—why do so few business leaders feel that investors are giving them credit for their sustainability investments?
We set out to answer that question and, in fact, found no correlation between the environmental component of a company’s overall ESG score and how much the market rewarded its sustainability efforts. At the same time, we knew that many companies were rewarded by investors for smart sustainability strategies. Maximizing your ESG score is important, but in our experience, the best sustainability strategies go beyond just checking all the boxes. Rather, they check some boxes—those that enhance competitive advantage—more than others. After all, with attractive and growing green profit pools across nearly all sectors, it should be possible to chart a value creation strategy that’s green in more ways than one.
Given that starting point, our hypothesis was that investors favor sustainability moves with a compelling business case over ones with a less clear economic rationale. Using this lens, we evaluated a rich dataset of sustainability-related initiatives announced between 2015 and 2022 by the world’s largest public companies, seeking to identify which elements of a thoughtful, verifiable business case were part of each one. We then looked at the market’s
reaction—and confirmed that initiatives with a more robust business case created more value.
We also found that greenwashing doesn’t work. Companies that issued a lot of announcements mentioning few
business case elements were punished. Investors reward a compelling narrative grounded in a smart sustainability
strategy that focuses on the material moves that drive competitive advantage. Companies that are clearer about
the intersection of their sustainability and value creation agendas may even help bridge the “great disconnect”
highlighted in our previous research between institutional commitments at investment firms and the actual investment criteria used by portfolio managers.
Elements of a Sustainability Business Case
Between 2015 and 2022, only 20% of companies saw a positive market reaction to 75% or more of their sustainability-related announcements—and nearly a third saw half or more of their announcements destroy value. (See Exhibit 1.) Moreover, after three days, the aggregate of announcements we studied didn’t deliver a shareholder return distinct from that of the overall market. But when we applied the business case lens, our hypothesis was confirmed. Those sustainability-related announcements that included some or all of the following seven elements associated with a strong business case did create value:
- Material to the Company. The effort is big enough to make a difference given the scale of the company.
- Material to the Sector. The investment area is seen by the Sustainability Accounting Standards Board as a material environmentally related disclosure topic. For example, in automotive, SASB calls out fuel economy and use phase emissions, material sourcing, and materials recycling as the critical disclosure topics.
- Connected to the Core. The initiative is tied to the company’s core strategy.
- Clear on Funding. The announcement discusses the investment’s magnitude and sources.
- Tangible Goals. The company offers a way for investors to monitor progress, such as a revenue target or deadline.
- Third-Party Verified. Progress will be audited by a trusted external entity such as the Science-Based Targets Initiative, which can attest to member companies’ progress toward their net-zero goals.
- Drives Value Creation. The announcement describes the move’s potential financial upside for the company