For investors focused purely on returns, investing in environmentally friendly firms may not seem like the most lucrative strategy. They may worry that adopting greener practices could hurt a company’s share price. But in a paper published by the Kellogg School of Management, researchers argue the opposite.
The researchers conclude that paying attention to a firms’ sustainability — captured in metrics called environmental, social, and governance (ESG) criteria — can actually improve the share price.
They suggest companies that follow sustainable business practices are more likely to outlast sudden industry shake-ups, such as new pollution regulations or consumer-driven demand for environmentally friendly products.
The research builds on previous work suggesting that well-governed firms — those that score high on the governance part of ESG ratings — perform better.
The authors point out that a firm’s worth depends on investors’ perception of its future cash flows, which in turn depend on the rules of the game in the future. They suggest that those rules are likely to change significantly given the increased public concern about environmental, governance, and social issues.
The researchers claim that companies that do not prepare for ESG-related changes “will lose out in the long run”.
For investors, paying attention to environment-related risks is particularly important in the age of social media, the authors say. Today’s consumers can communicate and mobilise much faster—for instance, to shame a company for its unsustainable practices.
Data shows that investors are taking note. In 2012, professional money managers considered ESG criteria in their investment strategies for 22% of global assets. By 2016, that figure rose to 26%.
Data published by the Global Sustainable Investment Review shows that in 2016, just over half the assets under management by institutional investors in Europe and Australia/NZ are taking into account ESG criteria. In the US, the proportion is lower at just over 20% but this can be expected to rise as awareness increases.
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