Higher ESG-rated companies have also been associated with lower idiosyncratic risks. According to The Journal of Portfolio Management, sustainable companies experienced a lower frequency of large, adverse idiosyncratic stock price moves between 2009 and 2019, compared with those that had a lower ESG rating.2 This could be attributed to better risk management and compliance standards across their operations and supply chain practices, resulting in organizations that are more resilient and less susceptible to the risks of black swan events, including compliance breaches and supply chain disruptions.
In other words, companies that focus on corporate sustainability tend to be less vulnerable to systematic risks, resulting in higher risk-adjusted returns for investors.
Improve access to capital and drive sustainable investing
According to a study by 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.3 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 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. Boards should steer the executive team to actively deploy ESG investing strategies and drive sustainable investing to build a long-term competitive advantage.