Your environmental, social and governance (ESG) performance can directly affect your market valuation.
That is the assessment given by Deloitte in a new report that assesses both the short and long-term implications of ESG management.
The management consultancy says that short-term issues, such as human rights issues, product recalls and protests, often trigger the strongest and most immediate impact on stock prices.
“ESG issues are particularly vexing because they can arise anywhere in a company’s value chain,” said Deloitte’s Eric Hespenheide, who heads up audit and enterprise risk within the company’s sustainability practice. “Many ESG risks – from labor protests and safety concerns to ecosystem damage – are embedded in vast corporate supply chains, where they are getting more attention.
“For many companies, these are often reputation risks – guilt by association – rather than direct operations or financial risks, and these risks cannot simply be outsourced.”
While investor decisions can be influenced by a company’s ESG disclosure around the time of a crisis, there is less convincing evidence that ESG performance leads to higher stock returns over the long-term, adds the report.
In order that you protect yourself against ESG crises when they arise and to be rewarded by investors for your ongoing ESG management efforts, Deloitte says that you need to consider whether to disclose information that explicitly ties these efforts to reductions in exposure to ESG risks.
The Deloitte report, called Finding the Value in Environmental, Social and Governance Performance, suggests that ESG performance will continue to be a consideration in financial valuation and offers a number of reasons risks may play an increasingly important role on performance. These include:
- The average investor is paying more attention to ESG information, especially related to downside risks;
- Volatility in the global business environment due to financial risks, regulatory uncertainty, extreme weather and social unrest are all more critical and persistent than previously thought;
- Today’s lean supply chains are often brittle and vulnerable to disruption because supply chain managers may be too focused on efficiency; and
- The rise of social media rivals the impact of public politics and regulatory processes.
“A closer look at ESG by the numbers suggests that it is a lens through which business leaders can build better, more resilient, and more valuable enterprises,” said Dinah A. Koehler, a senior research manager with Deloitte and co-author of the report.
You can view the report here.