Top 5 Reasons ESG Programs are important to shareholder value, and financial performance

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ESG programs are becoming an integral component of a holistic approach to compliance, transparency, and accountability. Are you ready?

Introduction

A recent report by the consulting firm McKinsey analyzes the results of their 2019 Global Survey on Sustainability. The report outlines increasingly positive perceptions around environmental, social, and governance (ESG) programs both at consumer focused enterprises and B2B companies.

Since McKinsey’s previous Global Survey of business leaders in 2009 on the subject of sustainability, ESG programs have gone from a side-note to a principle concern. For example, the share of respondents who agree that social programs can have positive effects has grown by 16% (long-term) and 26% (short-term). Here are five key findings from the report:

  • ESG programs continue to add shareholder value.

According to the report:

“83 percent of C-suite leaders and investment professionals say they expect that ESG programs will contribute more shareholder value in five years than today.”

This stems largely from a shifting political and media climate. Stakeholder expectations are increasingly focused on compliance, transparency, and accountability for environmental and social issues and customers are much more aware of their own impacts and image.

ESG programs are expected to provide long term shareholder value

While respondents to the survey were divided on whether ESG programs increased value in the short term, they were:

“nearly unanimous in perceiving long-term value from environmental programs. Social and governance programs approach the same levels, with 93 percent saying social programs make a positive long-term contribution, compared with 77 percent in 2009.”

Executives should invest in ESG programs in order to realize these anticipated benefits and adapt to a shifting compliance landscape.

Executives will pay a premium for anticipated benefits of ESG programs

When presented with a hypothetical scenario of purchasing another company the survey found that respondents were willing to pay a premium. The premium varied based on their belief in the value of ESG programs.

“…those that believe that ESG programs don’t increase shareholder value are willing to pay 10 percent more for a company with a positive record, while the median among those who say ESG programs increase value for shareholders is a premium of 15 percent.”

ESG programs contribute to increased company reputation and valuation, whether or not investors believe in their ability to increase shareholder value.

ESG Programs increase financial performance

Both surveys found that ESG programs are perceived to increase financial performance due to their role in:

“maintaining a good corporate reputation and attracting and retaining talent.”

In the most recent survey, respondents now feel that these programs:

“strengthen the organization’s competitive position and meet society’s expectations for good corporate behavior.”

ESG programs are increasingly important to remain competitive as a result of a shifting political and social climate.

ESG programs indicate good management

Among respondents who feel that ESG programs increase shareholder value:

“more than half say the existence of high-performing ESG programs is a proxy for good management.”

In addition to demonstrating good mange, these programs will help in attracting and retaining talent, as well as improving the public image of companies who adopt them.

Conclusion

Companies often implement ESG programs by adopting reporting standards and frameworks, following a checklist approach. This can help achieve short-term benefits such as increased public perception. However, executives should be willing to take a more holistic view on ESG and compliance to realize anticipated long-term benefits.

As more organizations adopt basic ESG standards and frameworks, consumers and stakeholders will demand more comprehensive approaches. Organizations should seek to integrate ESG principles in strategic decision making and operational planning in order to remain competitive in the long-term.

This holistic approach will require a shift in focus from a checklist approach to compliance to one focused on performance, transparency and accountability. These will become the hallmarks of organizations with effective ESG programs.

See Also

Five ways that ESG creates value

 


 

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