Top 5 Ways ESG Creates Value for Investors and Businesses

There is growing belief and evidence within the financial investment markets that a strong ESG focus within a company will lead to a strong financial performance.

NYU Stern Centre for Sustainable Business and Rockefeller Asset Management studied over 1,000 studies published between 2015 – 2020 on the relationship between ESG implementation and financial performance. It found that 58% of the ‘corporate’ studies saw a positive correlation between ESG and performance of Return on Equity (ROE), Return on Assets (ROA), or stock price.[1]

In 2015 the Smith School of Enterprise and the Environment at the University of Oxford and Arabesque Asset Management studied 200 company reports. They found that 88% of those that had a robust sustainability practice, had a better operational performance as a result.[2]

A study by Deutsche Bank’s Asset and Wealth Management division with the University of Hamburg identified a 62.5% rate of positive contribution by ESG to corporate financial performance in a survey of 2,250 academic studies.[3]

These studies show that companies involved in the investment and lending sectors are increasingly looking at the incorporation of ESG into a company’s strategy to assist in making investment or lending considerations. Furthermore, it has been commentated that a strong ESG performance has several positive relationships with financial performance:

• Improved financial performance due to ESG becoming more noticeable over time.
• Sustainability initiatives at corporations appear to drive better financial performance.
• Studies indicate that managing for a low carbon future improves financial performance.
• ESG disclosure on its own does not drive financial performance.

So why does a strong ESG performance assist in creating a stronger financial performance?

1. It is a good indicator of future financial performance

First and foremost, companies that are committed to their ESG goals and ideals are generally more likely to give investors a good return on their investment.

A paper focused on the study of long-term value creation found that companies with a positive ESG rating were more likely to have stable and profitable returns in the future.

2. It helps companies to attract investors

Secondly, investors and investing specialists acknowledge the importance of ESG, especially when it comes to their money. There is a growing interest in the principles that ESG stands for, and the research into this topic backs up that claim.

Companies that do not integrate ESG factors into their business strategies put their long-term competitiveness at risk and investors know it.

3. Successful ESG leaders enjoy a competitive edge

As ESG becomes part of the furniture when it comes to investing, companies who achieve or exceed the expectations of the ESG ideals will find they have a competitive edge against other companies lobbying for investment.

Companies with AA or AAA ESG ratings are known to investors as ‘leaders’ and enjoy this competitive perk, especially against those businesses known as ‘laggers’ who are outwardly failing to uphold ESG values.

This competitive edge can be measured across industries, S&P Global talks about mainstream investors showing a growing long-term interest in long-term investment opportunities and ESG integration.[4]

4. Quality employees are retained and attracted

For employees or potential employees, a robust ESG strategy allows a company to put its best foot forward during the discovery segment of attracting new talent. Companies can showcase the best of their company culture through social media.

In this way, ESG and the marketing of ESG accomplishments are shown to create a positive cycle when it comes to talent acquisition over time.

5. It will be good for the planet

It really is that simple. With more alarming news reports surrounding business operations and how they affect our environments more than ever before, investors are keen to put their money where their morals are. As a collective, these investors are slowly helping to shift corporate impact on the planet and its people.

For example, investors can take note of a company’s promise to become carbon neutral, and actively avoid businesses that have been in news for subjecting their employees to bad working conditions.

[1] NYU Stern Centre for Sustainable Business and Rockerfeller Asset Management Study

[2] From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance by Gordon L. Clark, Andreas Feiner, Michael Viehs :: SSRN

[3] Economy Views: Sustainability and financial success (db.com)

[4] https://www.spglobal.com/esg/csa/insights/demonstrating-business-value-of-sustainability