Higher company valuations:

One study from BCG found the top performers in specific ESG topics were rewarded by investors with valuation multiples that were 3% to 19% higher. (1)

• Top performers in certain ESG topics had margins that were up to 12.4% higher, all else being equal, than those of the median performers in those topics (1)
• Nonfinancial performance (as captured by the ESG metrics) was statistically significant in predicting the valuation of companies in all the industries we analyzed. (1)
• 2018, Bank of America Merrill Lynch found that firms with a better ESG record than their peers, produced higher three-year returns, were more likely to become high-quality stocks, were less likely to have large price declines, and were less likely to go bankrupt (2)
• One study linked these higher valuations to the fact these firms often prioritise their stakeholders, cultivating and maintaining high-quality relationships with suppliers, employees, and customers. This leads to leading to greater revenue generation, reduced costs (3)

Greater transparency lowers risk and risk perception

• 62.4% of investors are concerned about the risk of ‘stranded assets’ (i.e. assets that lose value prematurely due to environmental, social, or other external factors) and over one-third reported cutting their holdings of a company in the past year because of this risk.(4)
• Firms with effective sustainability prioritize transparency and disclosure. Increasing transparency and accountability builds trust with equity partners and minimizes risk perception through what the authors call “reduced informational asymmetry”. (5)
• This aligns with research findings from Vasi and King (2012): the mere perception of risk by stakeholders and investors can translate into a tangible financial loss for a firm.(6)
• Studies have found embedding a culture of sustainability into the core business pushes managers to adopt a long-term rather than a short-term orientation which results in stronger performance and less volatility (7)

Sustainability is becoming a key consideration for investors

• A study by BCG found 75% of investors expect improved revenue and operational efficiency when companies pay attention to their total societal impact; on profit, on people, and the planet. (8)
• Over 72% of S&P 500 companies are reporting on sustainability, demonstrating a growing recognition of the strong interest expressed by investors. (11)
• However, investors are still demanding more from the market. The 2020 EY Global Institutional Investor Survey shows investors found ESG is critical to decision making: 91% of investors surveyed say that nonfinancial performance has played a pivotal role in their investment decision-making over the past 12 months; a jump from 59.1% in 2015 and 34.8% in 2014 (9)
• According to a 2018 global survey by FTSE Russell, an index provider, more than half of global asset owners are currently implementing or evaluating ESG considerations in their investment strategy. (10)

Lower cost of capital and fewer barriers:

Environmental risk reporting will shortly become compulsory across much of the world and those without measures in place will find it difficult to gain financing.

• New Zealand has recently announced banks will be responsible for tracking carbon and climate impacts; meaning there will be high scrutiny on those they lend to. If a firm is not reporting transparently, or worse; doesn’t have a strategy for mitigation, this will impact their access to funding. Australia, Canada, UK, France, Japan, and the European Union have all announced the intention to follow suit. working. (12)
• Meta-studies show research almost unanimously demonstrates that strong environmental and social practices significantly decrease a firm’s cost of debt; 90% of studies support this link. (13, 14, 15)
• Firms with good sustainability standards enjoy a significantly lower cost of capital. Superior ESG performers receive around 1.8% reduction in the cost of equity (15)
• While those with social or environmental responsibility concerns pay between 7 and 18 points more than those with responsible practices. (16)
• Studies also show that credit ratings are positively affected by superior sustainability performance. (17, 18)
• A comprehensive study from the Harvard Business School and London Business School linked better CSR performance with significantly lower capital constraints. The study covered eight years of data across 49 countries, with a sample of more than 10, 000 firm-year pairs. (7)
• Ultimately, your company has a higher chance of accessing financial resources and improving cash flow if it adopts a sustainability strategy that is engaging and transparent.

References:

1. https://www.bcg.com/publications/2017/total-societal-impact-new-lens-strategy.aspx
2. https://latest.13d.com/esg-sustainable-investing-social-governance-environment-algorithmic-1b30afd373e4
3. https://dash.harvard.edu/bitstream/handle/1/9887635/cheng,ioannou,serafeim-Corporate%20Social%20Responsibility%20and%20Access%20to%20Finance.pdf;sequence=1
4. https://hbr.org/2016/10/the-comprehensive-business-case-for-sustainability
5. https://www.researchgate.net/publication/228118881_Corporate_Social_Responsibility_and_Access_to_Finance
6. https://journals.sagepub.com/doi/full/10.1177/0003122412448796
7. https://dash.harvard.edu/bitstream/handle/1/9887635/cheng,ioannou,serafeim-Corporate%20Social%20Responsibility%20and%20Access%20to%20Finance.pdf;sequence=1
8. https://www.bcg.com/publications/2018/business-opportunity-solving-world-big-problems.aspx
   (9) https://www.ey.com/en_bh/assurance/how-will-esg-performance-shape-your-future
   (10) https://www.ftserussell.com/files/support-document/2018-smart-beta-global-survey-findings-asset-owners
   (12) https://www.afr.com/companies/financial-services/new-zealand-makes-climate-reporting-compulsory-20200915-p55vno
   (13) https://arabesque.com/research/From_the_stockholder_to_the_stakeholder_web.pdf
   (14) Bauer, R., & Hann, D. (2010). Corporate Environmental Management and Credit Risk. ECCE Working Paper. University Maastricht, The European Centre for Corporate Engagement.
   (15) Chava, S. (2014). Environmental Externalities and Cost of Capital. Management Science, 60(9), 2223-2247.
   (16) Dhaliwal, D. S., Li, O. Z., Tsang, A., & Yang, Y. G. (2011). Voluntary Disclosure and the Cost of Equity Capital: The Initiative of Corporate Social Responsibility Reporting. The Accounting Review, 86(1), 59-100.
   (17) Attig, El Ghoul, Guedhami, Suh (2013)
   (18) Jiraporn, Jiraporn, Boesprasert, and Chang (2014)