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Integrated Management for Capital Markets and Strategy: The Challenges of “Value” Versus “Values” Sustainability Investment, Smart Beta, and Their Consequences for Corporate Leadership

Part of the CSR, Sustainability, Ethics & Governance book series (CSEG)

Abstract

The discussion regarding sustainability strategy and reporting has largely focused on the integration of financial and non-financial data. However, a silent but dramatic revolution in financial asset management markets has occurred, as accounting for risk factors related to sustainability issues has become mainstream. To navigate these changes, companies must develop and align two integrated process loops. First, the information requirements of rating and ranking organisations, as well as the asset managers themselves, must be addressed. As increasingly sophisticated techniques, such as “smart beta” or “factor investment” are used to isolate specific ESG-related risk or opportunity factors, the demands placed on companies to steer, manage, and align information flows will increase. This will require a more active process than the current one-way information flow, which only satisfies rating and ranking data requirements, to more actively engage capital market actors in a dynamic dialogue. Second, an equally important and challenging process loop will integrate external and internal financial and non-financial objectives in a common, operational framework. This will facilitate multiple objectives throughout the organisation, driving alignment, focus on objectives, and robust reporting and feedback to highlight enterprise-wide value creation. These twin process loops require the attention of company leaders to ensure effective external communication and integrated management of strategy design and delivery.

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Notes

  1. 1.

    Sustainable investments are defined here broadly as socially responsible investments that take account of environmental, social, and governance issues (ESG), recognizing however that the term has been widely interpreted in the literature. For further discussion, see for example, the Equator Principles for a set of criteria applied by banks for investment due diligence purposes, or for a narrower definition of sustainable investment, Impact Investment, which demands clear targets for ESG project impacts.

  2. 2.

    The Fama–French three-factor model is a model designed by Eugene Fama and Kenneth French to describe stock returns, encompassing (1) market risk, (2) the outperformance of small versus big companies, and (3) the outperformance of high book/market versus small book/market companies (Fama & French, 1992). However, the size and book/market ratio themselves are not in the model. For this reason, there is academic debate about the meaning of the last two factors.

  3. 3.

    See Chap. 13 for more information on the SASB standard and a comparison to the GRI standard.

  4. 4.

    Retrieved July 18, 2018, from ec.europa.eu/info/publications/180524-proposal-sustainable-finance_en

  5. 5.

    A Form 10-K is an annual report required by the U.S. Securities and Exchange Commission (SEC) that gives a comprehensive summary of a company’s financial performance.

  6. 6.

    Retrieved June 19, 2018, from edp.com/en/sustainability/economic-dimension/sustainability-indexes/esg-rating-agencies

  7. 7.

    Retrieved June 19, 2018, from nb.com/pages/public/global/insights/rating-the-raters-on-esg.aspx

  8. 8.

    For an overview of non-financial reporting initiatives see Chap. 13.

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Mountfield, A., Gardner, M., Kasemir, B., Lienin, S. (2019). Integrated Management for Capital Markets and Strategy: The Challenges of “Value” Versus “Values” Sustainability Investment, Smart Beta, and Their Consequences for Corporate Leadership. In: Wunder, T. (eds) Rethinking Strategic Management. CSR, Sustainability, Ethics & Governance. Springer, Cham. https://doi.org/10.1007/978-3-030-06014-5_6

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