Finding the Value in environmental, social, and governance performance

Environmental, social, and governance (ESG) issues can be material, presenting risks across a company’s entire value chain from supply chain labor disputes to large scale industrial accidents and product safety concerns. Today more than ever, investors are scrutinizing a company’s ESG performance for clues about the company’s future performance, and they are becoming increasingly sensitive to ESG risks. At the heart of the matter is the kind of information investors pay attention to — and that is news of an ESG material issue.

Our review of the evidence on investor behavior confirms that ESG issues can result in fundamental shifts in a company’s financial well-being, management and culture. A growing class of risks, they can be financially material and increasingly a concern in today’s growth-challenged and volatile environment, where even small shocks from the outside world can determine whether a company sinks or swims. Those companies that are demonstrably prepared for ESG shocks can better mitigate the downside risks, both short- and long-term when they occur. This makes disclosure on how companies manage their ESG risks all the more critical, because it can help attract and retain investors and establish the long-term value of ESG management.