ESG Investment: A Strategic Perspective for Business Executives
Today, ESG (Environmental, Social, and Governance) investment is trending. You’ll find ESG ratings of corporations on brokerage platforms and other sources. Many sentimental investors make decisions based on these ratings.
But does it actually matter to a rational investor if a corporation is environmentally conscious? Does it make a difference if a company has high social responsibility or respectable governance values? Do you believe that tobacco companies have lower returns compared to others?
The answer, as it turns out, is: it depends.
Research shows that ESG approaches have real potential to create value, even for the most unsentimental investor.
Revenue Growth: Companies with ESG ratings find it easier to win the hearts of both consumers and business partners. Their reputation is healthier, and their brand is stronger.
Cost Reduction: ESG-focused companies manage to significantly reduce costs related to energy, raw materials, and natural resources (up to 60%).
Reduced Regulations: ESG-oriented companies typically enjoy strong government support, subsidies, and more legal freedom, which helps them enter new markets, accelerate innovation, and reduce costs.
Labor Productivity: Strong ESG companies attract and retain better-quality talent. Research shows that companies with high workplace ratings generate 2.3%-3.8% higher returns.
Asset Productivity: ESG-focused companies make more long-term decisions, which ultimately rationalizes their investments and generates better returns on invested capital (ROIC).
In my opinion, it’s crucial to have a vision that integrates and focuses on the organization’s resources and development. If these values are genuine and not superficial, they will foster many innovative ideas and their implementation. This requires a vision that is not “blind,” but well-thought-out.
Source:
Valuation, Measuring and Managing the Value of Companies by McKinsey & Co, T. Koller, M. Goedhart, D. Wessels.