Environmental, social, and governance (ESG) is a set of standards that regulate a corporation and ensure that responsible, equitable decisions are taken. These goals are individually determined by corporations, and although not lawfully enforced, can be key to attracting (or deterring) potential investors. These standards are extremely multifaceted—companies may commit themselves to limiting their carbon footprint, creating a diverse workplace, or even conserving their water usage. “We are doing these things [integrating ESG] because it is the right thing to do,” Daniel Finn, Chief Financial Officer of Accenture North America said. “We believe that when we do the right thing, as a rule, we’re led to becoming a better company and to perform better.”
Incorporating ESG considerations into a company’s financial analysis is a continuous process—there is no one-time change that can be made to achieve sustainability. However, from the perspective of a corporation, some significant benefits can accompany the implementation of ESG goals. Studies show that strong ESG performance is positively correlated with higher equity returns and a reduction in downside risk (McKinsey). Shareholders are not only provided with the security and confidence to engage in more value-based investments—their portfolio is also diversified from an ethical and moral standpoint. “Companies are definitely making strides to integrate ESG. A lot of the companies are doing that because their clients are expecting them to do that,” Lauren Michalak, Managing Director, Business Strategy & Specialist Relations at Nuveen said.
Along with having the ability to mitigate risks, ESG can have immense effects on a corporation’s financial returns. An analysis of over 1,000 studies published since 2015 shows that strong corporate management of ESG standards is linked to improved Return on Equity (ROE), Return on Assets (ROA), stock price, operational efficiency, and risk management (NYU Stern).
While the future of finance, investing, and economics is uncertain and ever-changing, one thing is for sure—ESG is here to stay. ESG assets will hit $50 trillion by 2025, representing more than a third of the projected $140.5 trillion in total global assets under management (Bloomberg). Assuming ESG standardization and transparency are mandated in the near future, corporations will begin to focus on making a real impact and achieving more than monetary returns—saving our planet.
Stats:
https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Five%20ways%20that%20ESG%20creates%20value/Five-ways-that-ESG-creates-value.ashx (Witold Henisz, Tim Koller, and Robin Nuttall, 2019)
https://www.stern.nyu.edu/sites/default/files/assets/documents/NYU-RAM_ESG-Paper_2021%20Rev_0.pdf (Tensie Whelan, Ulrich Atz, Tracy Van Holt and Casey Clark, 2021)
Interviews:
Lauren Michalak, Managing Director, Business Strategy & Specialist Relations at Nuveen
Daniel Finn, Chief Financial Officer – Accenture North America
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