Why ESG performance is growing in importance for investors (2024)

The post-pandemic investment landscape is set to place greater value on environment, social and governance (ESG) disclosures.

There has been growing support in recent years for the concept of stakeholder capitalism and a recognition of the importance of creating long-term value. It is a commitment that, surprisingly to some, has remained strong despite the economic pressures that have risen from the COVID-19 pandemic.

Stakeholder capitalism is a philosophy based on the belief that companies have an obligation that goes beyond simply providing returns for shareholders. It suggests that companies should be mindful of, and responsive to, their impact on society and the environment. This can involve: creating secure jobs for employees, embracing sustainable practices, serving customers loyally, cultivating long-term supplier relationships, paying fair taxes or working to minimize the environmental footprint of operations.

This form of inclusive capitalism is not new – it was popular in the 1950s and 1960s – but it is now making a comeback, and this time it is closely linked with ESG issues such as climate change, diversity and human rights. Pre-COVID-19 examples of the move away from pure shareholder capitalism include: theDavos Manifestofrom the World Economic Forum (WEF), the Business Roundtable’sStatement on the Purpose of a Corporation, and theEmbankment Project for Inclusive Capitalismcreated by the EY organization and the Coalition for Inclusive Capitalism.

ESG and long-term recovery

There had been fears that with the emergency response to the COVID-19 pandemic, and with many companies facing an existential crisis, the focus would move away from ESG issues. But, in many respects, the opposite has occurred. It seems the COVID-19 pandemic has accelerated the transition to a more purposeful and inclusive capitalism. Although many organizations are in survival mode, ESG issues are likely to remain critical and essential to resilience and long-term recovery.

When businesses discuss economic risk and significanttrends, and when they consider specific threats, such as climate change and pandemics, they tend to take decisive action only when they believe that those risks are likely to impact them in the short term. Now that one of those risks has become a reality, that may change.

Encouragement is not lacking for this change of approach. Pressure is mounting, mainly from the public, with people issues (the “S” in ESG) coming to the fore. Companies that have treated their staff and suppliers well during the COVID-19 pandemic have likely improved their corporate reputations, and potentially gained more business.

Some companies, however, abandoned their declared purpose as economies started to dip. Such actions may have eroded trust and damaged reputations. Their actions may be remembered by potential customers and may echo in the minds of employees for a long time. It is likely that those companies that did not stand behind their values may lose business and, when economies rebound, their best talent may be looking elsewhere.

Why ESG performance is growing in importance for investors (2024)

FAQs

Why ESG performance is growing in importance for investors? ›

Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty. Companies that realign to the stakeholder capitalism agenda may have a competitive advantage over those that try to return to business as usual.

Why ESG rating is important for investors? ›

An ESG criteria is thought to help investors consider the 'unmeasured' or 'unrepresented' environmental, social and governance topics when making investment decisions. It reveals data that traditional financial analysis doesn't usually capture, speaking to a company's sustainability in its broadest sense.

Why is ESG important in investing? ›

This type of ethical investing strategy helps people align investment choices with personal values. ESG stands for environment, social and governance. ESG investors aim to buy the shares of companies that have demonstrated a willingness to improve their performance in these three areas.

Why is ESG important in investor relations? ›

ESG criteria give investors a holistic risk lens to evaluate a business or investment's key ESG-related risks. ESG analyst scores and investment ratings are designed to capture and reflect an investment's ESG risk profile.

Why ESG factors may be important factors for investors to consider in their investment decisions? ›

By incorporating ESG criteria, investors can identify companies that are better positioned to navigate the challenges of climate change, social unrest, and governance scandals, which can adversely affect profitability and sustainability.

How has ESG impacted investors? ›

From our experience and research, ESG links to cash flow in five important ways: (1) facilitating top-line growth, (2) reducing costs, (3) minimizing regulatory and legal interventions, (4) increasing employee productivity, and (5) optimizing investment and capital expenditures (Exhibit 2).

How ESG attracts investors? ›

ESG investing can help investors mitigate risks

Focusing on ESG issues forces companies to think about the long-term sustainability of their enterprise rather than short-term profits. Most investors also think in the long term rather than the short term.

Why is ESG more important now? ›

The Growing Importance of ESG Factors

Investors are becoming more conscious of the long-term risks associated with companies that do not prioritize sustainability. Secondly, social issues such as human rights, labor rights, and income inequality are gaining significant attention.

Why is ESG more important than ever? ›

Environmental, Social and Governance matters of any business are interlinked with each other and with the current COVID-19 pandemic, ESG has gained a greater importance among investors, policymakers, and other key stakeholders because it is seen as a way to safeguard businesses from future risks.

What is the most important in ESG? ›

All economic activity is a result of human behaviour, which then impacts human welfare, so the 'S' of ESG – environmental, social and governance – is arguably the most important dimension.

Why should investors care about ESG risks? ›

Sustainable or Environmental, Social and Governance (ESG) investing considers factors beyond traditional financial analysis. This may limit available investments and cause performance and exposures to differ from, and potentially be more concentrated in certain areas than the broader market.

Why do investors care about sustainability? ›

Sustainable investing promotes long-term economic growth by encouraging companies to operate more ethically and responsibly. It helps protect the environment by directing capital towards sustainable practices and technologies.

Do investors really care about ESG? ›

Retail investors do care a lot about the ESG-related activities of the firms they invest in, but only to the extent that they impact firm performance, independent of ESG performance.

Do investors consider ESG? ›

ESG analysis has become an increasingly important part of the investment process. For investment professionals, a key motivation in the practice of considering environmental, social, and governance (ESG) issues as part of their financial analysis is to gain a fuller understanding of the companies in which they invest.

What do investors look for in ESG reports? ›

Since ESG reports summarize the qualitative and quantitative benefits of a company's ESG activities, investors can screen investments, align investments to their values, and avoid companies with the risk of environmental damage, social missteps or corruption.

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