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Many studies show a correlation between companies that do well on ESG metrics and companies that generate higher shareholder returns than their peers.1 But there is little evidence that links ESG performance directly to shareholder value. Are the companies that perform well on ESG metrics just better run? Do they also manage their cash better? Are they better innovators?
What we can measure today is how specific ESG initiatives, such as decarbonization programs, can create shareholder value and how some initiatives can avoid destroying value. In this paper we look at how various environmental, social, and governance programs drive specific value levers, such as operating margin or cost of capital. With this knowledge, CFOs and other corporate leaders can craft ESG strategies that clearly balance financial benefits and costs.
Quantifying the benefits of ESG
One reason it is hard to determine whether ESG can enhance shareholder value is that there are no universally agreed methodologies or measurement standards (see “ESG measurement problems”). Measurements of ESG impact on shareholder value continue to evolve and researchers have looked at hundreds of possible links between ESG efforts and financial value.2This includes studies of the correlation between ESG news and changes in stock prices. One study found that stocks moved more when the ESGrelated news (positive or negative) was reported in five or more articles.3
Our strategy takes a bottom-up, enterprise-wide view of ESG efforts and links individual activities to impact on the main drivers of shareholder value. This provides a way to prioritize ESG efforts in ways that add value (or, in aggregate, limit the costs).
ESG measurement challenges
Financial data providers, such as Bloomberg, Refinitiv, S&P, and Sustainalytics, measure the ESG performance of companies, but these efforts reveal significant challenges:
- Poor transparency and data quality: The providers’ methodologies and assessment processes are not fully disclosed. Data may be self-reported by companies, obtained by third parties, or scraped from company websites.
- Inconsistent methodologies: Each firm producing ESG ratings uses a different formula and the weightings of the underlying attributes that comprise the component scores vary widely.
- Apples and oranges: ESG measurement covers many different types of data, from carbon footprint and employee experience to compliance. This makes it difficult to aggregate ESG in a rigorous, or even coherent, way.
- Policies, not practices: Much of the data collected centers on policies which are hard to measure. One organization measures ‘environmental supply chain’ policy in binary terms: companies have policies or they don’t. But this does not assess the effectiveness of the policy.
Due to these measurement problems, ESG ratings are only an indication of sustainability performance. The same company often receives different ESG scores from the various data providers and, in any case, the data are not looking forward. By contrast, bond ratings and analyst forecasts make predictions that will eventually be judged by financial outcomes. This report offers companies a practical way to drive improvements in shareholder value by integrating ESG goals into their operating models.
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1. Source: Tensie Whelan, Ulrich Atz and Casey Clark, “ESG and Financial Performance: Uncovering the relationship by aggregating evidence from 1,000-plus studies published between 2015-2020,” Rockefeller Asset Management and NYU Stern Center for Sustainable Business, February 10 , 2021
2. Source: Tensie Whelan, Ulrich Atz and Casey Clark, “ESG and Financial Performance: Uncovering the relationship by aggregating evidence from 1,000-plus studies published between 2015-2020,” Rockefeller Asset Management and NYU Stern Center for Sustainable Business, February 10 , 2021
3. Source: George Serafeim and Aaron Yoon. “Does positive ESG news help a company’s stock price ?,” Kellogg Insight, August 2, 2021
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