Until 2010, few investors paid attention to environmental, social and governance (ESG) data. Now information on labor policies, company carbon footprints, renewable energy use, and board composition is critical when investing.
Adopting ESG criteria brings resource savings, innovation, adds value to the product, attracts consumers and investors. In the first few weeks of global markets being down due to Covid-19, most ESG funds outperformed their benchmarks. George Serafeim of Harvard Business School and his colleagues analyzed more than 3,000 companies between February and March 2020 - when global financial markets were collapsing. They found that those that the public perceived as behaving more responsibly had less negative stock returns than their competitors. Respect for employees, advocacy of gender and race equity, and women's empowerment programs are among the points appreciated by those who want to invest in leading ESG companies.
From top to bottom!
The challenge for many competitive corporate leaders is how to communicate their ESG efforts. Transforming the culture of the organization must be a priority for the CEO and executives. Subsequently, the proposals presented as a purpose to all employees and partners. As the ESG field matures, investors will be seduced by the company's commitment to sustainability, social issues, and good governance.
The reason?
An ESG focus can help management reduce capital costs and improve the company's valuation. As more investors look to put money into companies with stronger ESG performance, larger pools of capital will be available to these corporations.
Another plus: positive action and transparency on ESG issues can help companies protect their valuations as more global regulators and governments require ESG disclosures. When the European Union announced broader performance requirements, the stock market reacted positively for companies with strong ESG disclosure and negatively for those with weak disclosure. South Africa, Brazil, India, and China also increase requirements.
How can companies anticipate and obtain financial benefits from their ESG programs?
1) Adopting strategic ESG practices;
2) Identifying a corporate purpose;
3) Building a culture of sustainability;
4) Making operational changes to ensure that the ESG strategy is successfully executed;
5) Committing to transparency and building relationships with investors.
The focus should be on direct communication with the consumer and the large asset managers who own the company's shares. Know that assessing a company's effects on people and the planet, and integrating them with traditional financial analysis, will provide a more comprehensive picture of actual corporate performance.
Want an example?
Pharmaceutical company Novartis disclosed to the market that it estimated its environmental impact, measured by carbon emissions and impacts on water and waste, at $4.7 billion in 2017. The positive impact generated was estimated at $72 billion.
The time has come for companies to see ESG as an opportunity for continued reputation, relationship building, and new investment.
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