ESG, the acronym for Environmental, Social, and Governance, represents the three critical factors used to assess a company’s ethical impact and sustainability. The rising importance of ESG in recent years can be attributed to the recognition of its potential impact on business valuations by investors.
Research has shown that companies with strong ESG performance outperform their peers in the long run. Harvard Business School conducted a study that found that companies with high ESG scores experienced better financial performance and had higher stock prices than those with lower scores. Similarly, a report by MSCI revealed that companies with strong ESG ratings consistently outperformed the market by an average of 2.7% annually over five years.
Apart from financial performance, ESG affects a company’s reputation and brand value. Nowadays, consumers are more inclined to support socially responsible companies, and ESG can differentiate a company in a crowded market. According to Nielsen, 66% of consumers are willing to pay a premium for products and services from companies that uphold strong social and environmental values.
ESG can also impact a company’s risk profile. Companies with poor ESG performance may face regulatory, reputational, and operational risks, leading to lower valuations, as investors may be hesitant to invest in companies with uncertain futures.
It is crucial to note that the impact of ESG on business financial performance is already evident from two main perspectives. Firstly, banks are starting to price debt according to ESG ratings. You must pay more for funding if you have a poor ESG score. Secondly, in our own business, we partner with Macquarie Bank, one of Australia’s five largest banks. To work with larger corporates, SMEs must report on their ESG performance. The inability to do so will result in the inability to work with such clients.
In summary, ESG is now a crucial consideration for investors when assessing business valuations. Companies prioritising ESG in their operations tend to outperform their peers in the long term, and ESG can influence a company’s reputation, risk profile, and financial performance. Therefore, companies must prioritise ESG considerations in their operations and for investors to consider ESG when evaluating investment opportunities. Doing so can create a future that prioritises sustainability and ethical standards while still achieving business success.
– Eccles, R. G., & Serafeim, G. (2013). The Performance Frontier: Innovating for a Sustainable Strategy. Harvard Business Review.
– MSCI (2019). Foundations of ESG Investing: How ESG Affects Equity Valuation, Risk and Performance.
– Nielsen (2015). The Sustainability Imperative.