With the incorporation of ESG metrics into investment dialogues, new modes of corporate social responsibility are emerging. It’s clear from the massive body of accumulating evidence that businesses that devote attention to ESG matters do not suffer any negative consequences in terms of value creation—in reality, the reverse is true. An attractive ESG strategy is associated with superior equity returns. This includes both an alignment and a momentum standpoint, as well as a reduction in the number of regulatory and legal interventions; all alongside attractive investment and asset optimization opportunities.
Reduction in the number of regulatory and legal interventions
Companies that have a better external-value offer (backed by data) are likely to obtain more strategic independence, hence alleviating regulatory pressure. In reality, we've seen time and time again across industries and regions that a strong ESG program may assist firms to lower their risk of being subjected to unfavorable government action. With the rapidly changing requirements for ESG reporting and a focus by governments across the globe on ESG reporting that is material and comparable, it is imperative to track the metrics that matter.
When it comes to ESG issues, it's crucial to remember that doing nothing is now not an option. The rules of the game are changing: government responses to emissions will almost certainly impact energy prices via increased operating costs, and they might have a particularly negative impact on the financial sheets of carbon-intensive sectors. Furthermore, additional prohibitions or restrictions on items such as single-use plastics or diesel-fueled automobiles in city centers will impose new restraints on a wide range of enterprises.
Investment and asset optimization are two terms that come to mind
As the market comes together around the need for standardized and meaningful ESG disclosures, investors will be enabled to conduct additional due diligence on companies and convert their findings into proxy votes. The relationship between corporate involvement and the incorporation of ESG data into the investing process will result in a future rise in market attention on strong ESG results. Results are key, just having an ESG strategy is not enough; short and long-term goals that are attainable and consistently achieved will become the standard.
A compelling ESG proposition may increase investment returns by directing resources to more attractive and more sustainable alternatives (renewables, waste reduction, and sequestration). It may also assist businesses in avoiding stranded investments that lose profitability in the long run due to long-term environmental challenges (such as massive write-downs in the value of oil tankers). In order to properly account for investment returns, you must begin with the right baseline of reference, including risk scenarios related to climate and ESG.
Moving forward with ESG credentials
Whatever the conditions of your firm, it will be the CEO's responsibility to gather support behind the activities that are most closely aligned with its objective. Top-performing CEOs throughout the globe are no longer evaluated solely on the basis of their financial success but also on their involvement with social and environmental concerns, as indicated by the 2015 Harvard Business Review's ranking of chief executive officers.
It is not true that shareholders and stakeholders compete in a zero-sum game. Building a strong relationship with wide segments of society, on the other hand, adds value, not least because it helps to ensure that the business model is resilient and sustainable in the long run.