ESG disclosures are becoming increasingly valuable for investors as they look to drive value for the company.
When it comes to environmental, social and governance (ESG) programs, the investment landscape has changed. Once relegated to lengthy, standalone sustainability reports that often failed to attract much attention, ESG has become a top priority on investors’ agendas.
What is ESG?
Environmental, social and governance is the term used to identify matters that may traditionally be associated with sustainability or corporate responsibility, but that are deemed to have a material financial impact on an organization’s short- and long-term value. These matters can vary based on industry and geography, on the nature and scale of the organization’s operations and supply chain, on its business strategy and values, and on its investor base.
In Canada, investments that consider ESG are now valued at well over $2 trillion in assets under management across all major investment classes.¹ In a 2018 Responsible Investment Association (RIA) study, Canadian investors reported that the two main ESG considerations they look for are fiduciary duty and risk management.² This underscores the fact that ESG has moved beyond basic corporate responsibility and into the domain of financial performance and enterprise risk.
So how can boards and executives meet this new investor demand for ESG information in a way that drives value for the organization? There are three things that companies should know to help answer this question.
ESG reduces risk and drives value creation
Research shows consistently that ESG and corporate performance are linked.
It’s been well known for many years that companies with good governance practices demonstrate stronger corporate performance. But more recent studies are consistently proving that performance across all three pillars of ESG drives investment returns. A 2015 metastudy of more than 200 sources by Oxford University and Arabesque Partners noted that “80% of the reviewed studies demonstrate that prudent sustainability practices have a positive influence on investment performance.”³
Geography matters when it comes to investors’ views on the drivers of this link. According to a report from RBC, most Canadian investors tend to think of ESG as a risk mitigation activity (68%) as opposed to a source of alpha (21%), while most European investors believe both to be the case.⁴ Regardless of the driver, global investors are clearly well aware of the potential link between ESG and financial performance.