Businesses that undertake genuine sustainability-related business cases are rewarded in the market while those making superficial sustainability efforts are penalised, a report from BCG has found.

“Investors reward a compelling narrative grounded in a smart sustainability strategy that focuses on the material moves that drive competitive advantage,” the BCG report titled ‘Investors Want to Know Your Sustainability Business Case’ stated.

BCG analysed a database of approximately 47,000 sustainability-related announcements issued by the 1,000 largest public companies from January 2015 to December 2022.  The analysis sought to determine if there was a correlation between the environmental component of a company’s Environmental Social and Governance (ESG) scores and how much the market responded to said sustainability efforts.

The report found that the sustainability business case of a company is an important factor in investors' decision-making, but not all activities are equal, with investors placing greater value sustainability-related announcements that are quantifiable and impactful.

Seven elements were identified as being associated with strong business cases that created value.  These were:

1. Can make a difference given the scale of the company.
2. The investment area is considered to be material environmentally related disclosure topic by the Sustainability Accounting Standards Board.
3. Connected to the company’s core strategy.
4. Clearly discusses the investment’s magnitude and sources.
5. Provides a clear and tangible way for investors to monitor progress.
6. Audited by a trusted external entity such as the Science-Based Targets Initiative.
7. Describes the move’s potential financial upside for the company.

Companies where around one-fifth or more of their sustainability announcements included five or more of these seven business case elements were found to perform the best. BCG emphasised the importance of engaging in high-quality sustainability initiatives in a consistent manner to reap the greatest rewards. 

On the flip side, the report noted that “Companies that issued a lot of announcements mentioning few business case elements were punished,” with the data finding that companies with many low-quality sustainability announcements lost value.

The report took a deep dive into three sectors that are impacted most strongly by climate concerns and the energy transition – mining, automotive, and consumer goods – to examine how sound sustainability business cases create value across the sectors. It found that for all three sectors, announcements that incorporated five or more of the business case elements outperformed those that included two or fewer by 2.1 percentage points.

Read the full report here.