Is My Investment Creating ESG Related Value?

ESG related investing has been exploded in recent years to a total value of $30 trillion with no end in sight.

Businesses that are struggling with environmental, social, and governance issues may face a hard time in getting necessary capital. Future investors should be aware that the cost of capital is becoming a major ESG driver for businesses in the future.[1]

But how do I know if my investment or the company I’m watching is focusing on value creation linked to ESG?

Companies looking for a strong ESG orientation will create value in five major ways:

Top-line growth: Companies need to change their orientation to attract future customers. The strategic direction needs to shift to sustainability and stakeholder engagement. Sustainable products will be essential to open new markets as well as expand existing ones. Studies already show that consumers are willing to pay a higher price for sustainable products. A study by the University of Pennsylvania found that mining companies engaging in social activities are getting easier access to resources without extensive planning and operational delay[2].

Cost reduction: ESG has the big potential to reduce costs dramatically. Reduce water, waste, and energy consumption can be a major driver to minimize cost. Another factor that will be a major cost block in the future is carbon emissions. Carbon emissions will be directly linked to the cost of capital. Reducing or avoiding carbon emission is already on the agenda for many big firms such as Amazon or BP.

Regulatory and legal interventions: A strong ESG focus can bring companies not only in a comfortable position concerning government regulations and regulatory pressure but also stimulate government subsidies. Almost every sector is exposed to government regulations. Companies not following the ESG mindset of governments can become easily targets of adverse government actions.

Productivity Uplift: The ESG mindset of a company can be directly linked to employee motivation. A higher motivated workforce can uplift productivity which influences shareholder returns positively. Another effect of a strong ESG position can increase the companies chances to find high-quality employees. As future generations have a higher awareness of ESG issues, this can also help to recruit young talents.

Investment and asset optimization: Companies with a strong ESG position will allocate their money to more sustainable investments such as renewables or waste reduction. Relying on energy hungry assets can become an expensive burden in the upcoming years as emitting carbon become more and more expensive.[1]

Article Sources

[1] McKinsey and Company, Five ways that ESG creates value, getting your environmental, social and governance (ESG) proposition right links to higher value creation. Here’s why. November 2019

[2] Henisz, W. J., Dorobantu, S., & Nartey, L. J. (2014). Spinning Gold: The Financial Returns to Stakeholder Engagement. Strategic Management Journal, 35 (12), 1727-1748.

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