By Raz Godelnik, TriplePundit

Two weeks ago we reviewed a new report of Deloitte focusing on how to connect the dots between investors and companies when it comes to ESG. The report provided some interesting insights on the value of ESG, including the notion that “the strongest evidence that ESG performance impacts financial performance is found in short-term event studies.”

I thought it would be interesting to discuss this with Ioannis Ioannou, Assistant Professor of Strategy and Entrepreneurship at the London Business School, whose research focuses on sustainability and CSR, and hear his perspective on some of the issues mentioned in the report.

Here is an edited version of the interview I conducted with Prof. Ioannou.

TriplePundit: Why do you think the majority of investors have hard time recognizing the value of ESG?

Ioannis Ioannou: I think there are a couple of reasons why the communication channel between companies and investors on ESG issues has been problematic. First, CSR (and the corresponding metrics in the form of ESG) came with historical “baggage”; CSR used to be confined to a set of corporate activities, like corporate philanthropy, that were not explicitly linked to competitive advantage but rather, they were justified in terms of normative or moralistic arguments.

Second, there exists excessive information out there today in terms of ESG data, and it is not clear that all of it is useful or relevant. Therefore, investors can be either overwhelmed with all this information, or be inclined to completely ignore it simply because it is so difficult to characterize what is material and what is not.

Third, related to the previous point, often enough ESG information is presented in a language or in metrics (e.g. units) that do not directly lend themselves to be included in traditional valuation models. For example, how can an investor incorporate in her valuation the fact that, say, one thousand new engineers have graduated from company-sponsored schools in a given year (a metric that is often reported by companies that provide scholarships or that fund schools)?

Fourth, one needs to account for the fact that valuation models take time to adjust. Accounting for ESG information in an investment decision constitutes quite a radical change.

Read the full interview here.