Corporates could unlock significant value by properly targeting investment to close their ‘sustainability gaps’, according to a new report from market intelligence specialists Brand Finance.

Heralded in a January project launch at the World Economic Forum in Davos, the inaugural Sustainability Gap Index examines the financial differences – and sometimes gulfs – between sustainability perceptions and performance across 4,000 brands.

In a poll of 150,000 people across 36 countries, Brand Finance set out to gauge how sustainable those brands are thought to be, based upon how their relevant communications – or lack thereof – have affected public attitudes.

Analysts then mapped those results against hard data on the brands’ actual sustainability performance, as documented on the public resource CSRHub, to highlight where brands may have sustainability gaps – in other words, measuring whether they are overplaying or underplaying their environmental, social and governance (ESG) activities.

While brands on the former path would be effectively greenwashing, those on the latter would be ‘greenhushing’ – or making too little of real and substantive ESG efforts.

Business imperative

As Brand Finance’s report explains: “Where performance exceeds perception, there is an opportunity to rapidly generate value, by communicating the brand’s genuine commitment to sustainability more effectively.

“Conversely, where perception exceeds performance, value is at imminent risk, as brands leave themselves open to public backlash and a ‘correction’ of their sustainability perceptions value.”

One of the most surprising results from the Index is that electric vehicles manufacturer Tesla has the highest amount of value at risk from perceptions exceeding performance. Although the brand is widely thought to be making a positive contribution to the environment, it has nonetheless registered weak CSRHub scores on social and governance matters – leaving $4.1bn (£3.1bn) at risk.

On the opposite end of the spectrum, Microsoft has the highest positive gap value of any brand, amounting to $1.5bn (£1.1bn). This demonstrates that the brand’s sustainability performance exceeds its perception value – which means that it stands to generate up to $1.5bn through enhanced communication of its ESG initiatives and relevant services.

In a foreword to the report, Brand Finance Strategy and Sustainability Director Robert Haigh says that the Index’s results go to the heart of how companies must balance investment between ESG communications and tangible endeavours.

“Investors, CFOs and CEOs have been told by campaigners, NGOs and sustainability teams for years that committing financially to sustainability is both the right thing to do and a business imperative,” Haigh writes.

However, without articulating the case in financial terms – enabling business case evaluation and return on investment analysis – it can be difficult for brands to justify to shareholders the type of investment that is required, Haigh warns.

Haigh says the individual companies could gain billions of dollars of financial value from enhanced action and associated communications. "Equally, there can be billions at risk from insufficient action that leads to accusations of greenwashing – or even misallocated or excessive investments in sustainability communication that does not cut through.”

Critical friend

Speaking to Insights, Haigh highlights the valuable role that finance professionals can play in helping brands close their sustainability gaps.

“As financial stewards and defenders of shareholder interests, CFOs and accountants should be the most attuned to such opportunities and risks. Where there is value to be gained from enhanced communication, they should be allies of marketing teams and facilitate appropriate investment.

“Where value-at-risk is identified, they should be a critical friend, ensuring that communication is authentic and merited. In addition, they should be prepared to authorise the sustainability investments that will help to close the performance-perception gap, thereby mitigating risk.”

Haigh believes CFOs and accountants should be central to the development of almost any investment case – and sustainability is no different.

“In terms of persuading shareholders, one of the challenges up until now has been the difficulty of making a robust case for investment. There has been a generalised sense that ESG and sustainability are important – but without the ability to assess return on investment, shareholders can be understandably reluctant.”

“We hope that the Index creates the foundation for CFOs to make a compelling case to shareholders, analysts and potential investors. This is, of course, just the first step: every business will have a different array of sustainability issues and a range of stakeholder groups, so further research and analysis should be undertaken to make a truly robust case.”

ICAEW Climate Change Manager Sarah Reay says: “With greenwashing becoming an increasing risk for organisations, many entities that are performing highly on sustainability targets may feel less inclined to publicly disclose them amid fears of public backlash. The findings of this report highlight the value of communicating this information to stakeholders effectively, as there is huge potential for brands to unlock financial value.”