Experts Also Predict that 30% of Total Debt Capital Markets Funding Will Be Directed Towards ESG Initiatives by 2026
Many organizations 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 CFOs have already experienced positive returns from placing an emphasis on sustainability and through small-scale, green capital investments,” said Melanie O’Brien, VP 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.”
Embracing Sustainability as a Driver of Returns
O’Brien said that traditional investment methodologies often overlook the value of nonfinancial and intangible benefits when considering investment returns. Progressive organizations that are embracing sustainability as a driver of returns have begun to update their investment criteria in a similar fashion to how leading organizations assess the nontangible benefits of their digital investments.
Organizations that can account for the enterprise value of their sustainable investments, connect them to broader corporate strategy and show clear benefits to the organization will likely be seen favorably by investors and other stakeholders.
One way this is already being made tangible is in the debt capital markets, as organizations partially mitigate the challenges of a higher interest rate environment by issuing ESG-linked bonds, which receive more favorable discount rates than their conventional equivalents. Gartner predicts that more than $3 trillion of ESG-linked bonds will be issued by 2026, accounting for 30% of total market issuance.
Adjusting Investment Methodologies
To further accomplish financially aligned sustainability goals, 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 organizations will streamline geographies and subsidiaries due to sustainability regulatory requirements by 2026.
- Ensuring that investments which demonstrate clear nonfinancial but significant benefit to the organization 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 organizations 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).
