Demonstrate strong sustainability commitment to lower financing costs
Another factor linking sustainability to value creation is the impact of corporate sustainability on a firm’s cost of capital. Companies that focus on corporate sustainability tend to be less vulnerable to systematic risks. This, in turn, results in higher risk-adjusted returns for investors.
For example, a company that considers ESG-related metrics in its operations would be cushioned from the impact of increasing regulations due to heightened government scrutiny of the environmental impact of economic activities. Corporate executives in such a company would already have measures in place to mitigate the impact of operations on the environment, thereby reducing the burden of new legislation on the business.
According to Bloomberg, global ESG assets are on track to exceed US$53t by 2025, accounting for more than a third of projected total assets under management for that year.4 Most institutional investors incorporate ESG considerations in their investment framework and apply negative or positive screening techniques to integrate ESG elements with traditional financial analysis. Against this backdrop, companies that demonstrate a strong commitment to sustainability will be viewed more favorably by these providers of capital, and therefore have access to more sources of financing at a lower cost.
Investments in ESG-related initiatives undertaken by companies may also be valued at an “ESG-specific multiple” that is at a premium compared with the rest of the business.