One of the prickliest aspects of business happens to be the one where it has to take a stance addressing existing social and environmental issues. Should an organization pressurize the U.S. states to restructure discriminatory laws, or turn it into a brand of activism? Unsurprisingly, investors are inquisitive whether this new dimension would soft-pedal the organization from generating profits? The answer is no. No, it doesn’t detract an organization from generating profits.
As per a recently completed study, firms that are investing in activism and ESP – environmental, social and governance – issues show better stock market performance and profitability in the future. For companies, this suggests that their efforts are bearing fruits, for investors, this means that there is significant value from analyzing non-financial data and infusing it into their decisions.
This doesn’t mean that such initiatives are fruit bearing. According to a research, companies should only embrace social and environmental issues that are seen as strategically important for their business, if they want their efforts to contribute to its valuation. For example, jumping into the environmental impact of so and so can be a very important piece of business strategy for a company in the transportation or fuel industry. For companies in healthcare or financial institutions, it’s important to jump into the fair marketing and advertising of products side of issues.
It can be easily derived from the above mentioned information, that ESG investments are profitable for different industries.
As per the data made available recently by the Sustainability Accounting Standards Board, ESG issues have shown different financial effects for different industries. Firms that are investing into material ESG issues outshine their peers in the future when it comes to risk-adjusted stock price performance, profitability margin growth, and sales growth. On the contrary, firms investing in immaterial ESG issues are shown to have similar performance to that of their peers, insinuating that such investments are not value pertinent on average.
The study warded off reverse causality. Itdoes not imply that more profitable firms choose to pour more money into ESG. This was derived by regulating for the connection between the levels of investments with the present firm profitability, size, financial leverage, valuation, and by studying stock price performance and implementing a trading strategy that an investor could execute in real time.
The results suggest that companies need to embrace ESG issues that strategically linked to the future of their business. By improving their performance on such issues, the companies are directly paving the way for a better future. Moreover, they will also be able to show their investors how they’re performing on such issues by showing KPIs. It’s not just companies that can strategically scrutinize which ESG issues to choose, investors can do the same too. Companies that choose to invest in issues that are most related to their business, are most likely to enjoy a significant hike in social and financial performance.