In the U.S., ‘Nutrition Facts’ labels were introduced by the ‘Nutrition Labeling and Education Act’ signed into law by President George H. W. Bush in 1990. The act sought to enable consumers to eat a better and healthier diet, in line with government policy for over a century. The need for disclosure and guidance was required to manage the increasingly wild health claims made by food producers in the 80s.
Prompted by the European Union, a similar evolution is about to occur in the stock markets worldwide, as discussed in ‘The Cat is Out of the Bag’ last October. To elaborate and pursue the food analogy, imagine a ‘Sustainability Facts’ label (modeled on the home-made one below) stuck on the equity share of any company, including those preparing for an IPO or subject to an M&A acquisition:
Alas, as demonstrated by the experience with food labels, transparency without education has no benefits. Today, market participants are ESG-illiterate: they struggle to assess the impact of sustainability performance data on business risks and opportunities and, by extension, on asset valuation.
But, over time, the growing commonality and accessibility of ESG data will lead to a full repricing of equities, with far-reaching implications for any given firm’s strategy, operations, capital structure, and financing. Many investors and issuers anticipating this new chapter in corporate finance are rushing to learn how to translate ESG performance data into valuation premium or discount. As an asset manager or an executive team, what better way to generate abnormal returns than to see today what others will see tomorrow?
There will be pitfalls along the way. In particular, the concept of ‘scientific evidence’ tends to be surprisingly dynamic. Tim Spector illustrates the fraught relationship between food and science behind the nutritional facts label in his books, including most recently in ‘Food For Life’ (2022). Contrary to common wisdom, for example, there appears to be no scientific evidence that Vitamin C boosts the immune system or that cutting back on salt prolongs life. Food labels today are read differently than ten years ago because nutrition is an inexact science. Sustainability will prove so, too, leading to some incompressible market inefficiency.
Notwithstanding these challenges, faced with new disclosure requirements and opportunities, firms have a dual imperative: to build a business system that integrates sustainability factors; and to develop enhanced corporate finance capabilities.
Political distractions aside, this is the new race to long-term shareholder value creation.
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