While the U.S. financial and political community wrestles with ESG as an investment tool, the corporate world is not taking part in the debate. Driven by stakeholder demand and multinational acceptance, companies are pushing forward with environmental, social, and governance programs that help them create better organizations.
A Morningstar Sustainalytics survey showed that 90 percent of companies are developing or have already developed formal ESG strategies. The survey found that:
Senior corporate leadership is driving the trend, setting the tone from the top.
Institutional investors, activist shareholders, and customers, however, are also heavily influencing the decision to focus on ESG.
Environmental factors top the list of concerns for companies, although social and governance issues like safety and human rights are high on the list.
What Does it Mean for Investors?
ESG is becoming a universally accepted piece of business strategy for corporations. As they solidify and report on practices, investors will have a clearer picture of where the business may be headed.
Alyssa Stankiewicz, Associate Director of sustainability research at Morningstar, summarized the impact well:
It is increasingly apparent that material environmental and social factors play a role in a company’s performance and shareholder returns. If a company’s supply chain is prone to increasingly frequent severe weather events…it’s prudent to shore up protections and infrastructure...If a company is proactive about treating its workforce well, it won’t suffer as much as competitors from turnover, and it will save on costs like hiring and training new employees.
Companies that are not considering ESG factors open themselves to liabilities that could otherwise be managed. That goes beyond the idea of reporting on ESG for the sake of meeting regulations or “checking the box” for analysts.
Leading companies are instead focused on the opportunity to create value and long term stability for employees, shareholders, and customers.
What Should Financial Advisors Do?
Take ESG seriously. Global, publicly traded corporations are using ESG to create value and mitigate risk. As best practices evolve, funds and tailored portfolios that dismiss ESG data will be at a significant disadvantage.
Want to learn more about ESG Forward? Check out our Digital Product library.