Perspectives
Do the right thing; it’s a meaningful philosophy.
For many years, achieving environment, social, and governance standards (ESG) was a way to leverage goodwill as added value to projects. But in a space where investors were squarely driven by valuation, goodwill only went so far.
Fast forward to our post-COVID world. ESG is increasingly emerging as standard practice – beyond just doing the right thing. Is this shifting investor priorities? Or is ESG moving from option to necessity, as a method to validate investor value?
Here’s what we know about ESG
Incorporating good ESG practices result in future benefits – specifically, return on investment. There is no longer a trade-off between applying environmental and social stewardship and investment returns. ESG is no longer perceived as a risk. On the contrary, it combats risk and achieves a more certain outcome.
Applying ESG metrics provides a significant economic benefit to firms. This is backed by sources including Oxford University, Goldman Sachs, Arabesque partners, and Insead who have reviewed over 200 studies, industry reports, and articles to assess the business case for ESG. They found that:
- Sound sustainability practices led to reduced capital costs stemming from lower legal, reputation, and regulatory risks
- Solid ESG practices improved operational and financial performance as a result of reduced downtime, increased revenue per employee, and improved return on assets
- Good sustainability practices increased enterprise value via higher stock prices
Why ESG matters even more in a post-pandemic world
But as we transition to a post-pandemic era, will things change? Will investors expect more? Perhaps there are additional criteria to consider? The importance of people is central. How companies respond to the ‘S’ of ESG may reflect on their performance into the future. The protection of human health and safety will be paramount, including mental health and well-being. Companies that look after their people and communities may end up with stronger overall outcomes.
You don’t need to go searching too far in the news to realize that poor environmental and social management can lead to substantial financial burdens – often unplanned – equating to multi-million-dollar remediation, restoration, and regulatory costs.
On the flip side, positive firm valuations can stem from good ESG practices such as: energy conservation, water reuse and efficiencies, climate resilience planning, strong community reputation, and robust HSE application. These all demonstrate a company’s strong governance, an understanding of critical business risks, and a proactive, long-term vision. Perhaps in our post pandemic future we will see the need to have stronger social drivers and metrics – including measures of diversity and inclusion, and mental well-being?
How ESG is changing
We have already seen some changes and wonder if we’ll see more. In the investment community, there has been a demographic shift at the shareholder level, particularly among millennials and women. Thirty trillion dollars has transitioned to millennials, most of whom consider environmental impact important when making investment choices. Seventy-three percent of women agree. Together, these two groups are emerging as key drivers of ESG practices.
ESG investing is a type of sustainable investing. Sustainable investments seek positive returns, but also consider and evaluate the long-term impact that business practices have on society, the environment, and overall business performance.
There’s a clear desire for sustainable investment. The question remains whether the focus will change as we move beyond COVID-19.
Get the answer to this all-important question when we ask our experts to consider how COVID-19 may affect ESG. Stay tuned!
