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ESG Factors and Outperformance

Post on: January 3, 2018 | Tricia Dunlap | 0

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The following is a guest post written by Tricia Dunlap, founder of Dunlap Law. Tricia uses her sustainability expertise to advise companies and investors on the fast-maturing world of sustainability and integrated reporting, including the SASB, GRI, and "Green Guides," the EU reporting directive and other legal and quasi-legal frameworks that impact performance, strategy, and communication.

Traditional financial metrics are no longer enough.

That’s the consensus among leaders of the biggest private equity firms, institutional investors, and financial institutions. These gatekeepers to capital now also rely on environmental, social, and governance (“ESG”) performance data to get a more complete picture of corporate operations and value.


Research and returns support their approach. Environmental, social, and governance issues feed into corporate value and impact mid- and long-term prospects for creating and sustaining corporate value. Recent findings show that companies with excellent scores on ESG factors are lower risk with less volatility in price or earnings, and a lower risk of bankruptcy. In June, 2017 Bank of America/ Merrill Lynch concluded that investors who added ESG analysis to their overall assessment could have avoided 90% of corporate bankruptcies since 2008. A 2014 study from Harvard Business School tracked 90 early-adopters of sustainability initiatives against their traditional peers and found that high-sustainability companies evolved into fundamentally different types of companies and also outperformed their traditional competitors on both accounting and financial metrics.

ESG factors impact value.

Over the long-term, environmental, social and governance (ESG) issues – ranging from climate change to diversity to board effectiveness – have real and quantifiable financial impacts

~ Larry Fink, Chairman, BlackRock (2016)

In the 1970’s when financial accounting rules were standardized, approximately 80% of corporate assets were tangible and easily measured. Bricks and mortar. Trucks. Equipment. Today, 80% of assets are intangible. Corporate value is more likely to rely on intellectual property, brand value and goodwill, quality leadership, attracting and keeping talented people, or the ability to innovate effectively and quickly in a highly dynamic world. Traditional financial metrics are not designed to measure how corporations manage these capitals. Though originally focused primarily on environmental issues, sustainability has evolved into a comprehensive business management discipline that measures, manages, and reports performance on a wide range of ESG issues. And, increasingly, investors get it.

Investors expect companies to figure out which ESG issues are material to their company, then integrate those issues into overall strategy, and report their performance. Newly introduced standardized metrics from the Sustainability Accounting Standards Board (SASB) provide a road map. Since 2011, the California Public Employees' Retirement System (CalPERS) has included ESG factors in its investment of $156 billion in public equities markets. In the last three years, firms such as BlackRock, Carlyle Group, State Street, and Vanguard have followed institutional investors’ lead. Now, financial institutions are offering lower interest rates to companies with strong ESG performance metrics.

The handwriting is on the wall and access to capital is at stake. How will you adapt?

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Tricia Dunlap

Tricia Dunlap, founder of Dunlap Law, uses her sustainability expertise to advise compaies and investors on the fast-maturing world of sustainability and integrated reporting, including the SASB, GRI, and "Green Guides," the EU reporting directive and other legal and quasi-legal frameworks that impact performance, strategy, and communication.
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