ESG investing—or investing in companies with high Environmental, Social, and Governance ratings—is rapidly gaining popularity. In fact, a recent study showed that 74 percent of institutional investors now consider ESG factors when making investment decisions.
While some people view ESG investing as simply a way to "do good," the reality is that it can also be a lucrative investment strategy. In fact, studies have consistently shown that ESG investing can lead to outperformance when compared to traditional investments.
So, what's driving this growth? In short, it's because more and more investors are beginning to realize that ESG factors can have a real impact on a company's financial performance. Here's a closer look at three ways in which ESG is creating economic value for companies around the world:
1. Improved Communication With Investors
One of the most important functions of any publicly-traded company is to communicate effectively with its shareholders. This communication takes many different forms, but one of the most important is disclosures related to financial performance.
In recent years, there has been an increased focus on corporate disclosure of Environmental, Social, and Governance (ESG) information. While this may seem like an unnecessary cost or burden for companies, there is actually a growing body of evidence that suggests disclosing positive ESG impacts can lead to improved stock performance. For example, one study found that S&P 500 companies who scored in the top quartile for comprehensive sustainability disclosure outperformed their peers by 2.5 percent annually from 2008-2016.
2. Reduced Costs Associated With Regulation Compliance
Companies are subject to an ever-growing web of environmental regulations at both the federal and state level. While some see these regulations as burdensome or excessive, compliance can actually create economic value for companies—if they're done right . In fact, one study estimates that every $1 spent on regulatory compliance generates $3-$4 in benefits for society as a whole. What's more, another study found that companies who embrace sustainable business practices actually had lower costs associated with complying environmental regulations. So not only is compliance good for society as a whole—it can also save your company money in the long run!
3. Improved Employee Morale
As awareness of the risks posed by climate change and other environmental problems grows, more and more employees are looking for employers who are proactive about addressing these issues . What's more, several studies have found that employees who believe their company is doing good in the world are happier and more productive than those who don't. So not only is implementing sustainable business practices good for the environment—it's good for your business, too!
Overall, it's clear that there are numerous ways in which ESG creates economic value for businesses around the world. From attracting new investment to reducing compliance costs, sustainability just makes good business sense. So if you're not already incorporating ESG into your business strategy, now is the time to start!
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