The concept of Environmental, Social, and Governance (ESG) criteria has stirred significant debate, often polarized by differing views on climate change, social equity, and corporate accountability. Despite economic challenges and political opposition, a recent Teneo survey shows that 92% of CEOs are determined to continue their ESG efforts in 2024. This commitment is especially strong in regions new to ESG, like Latin America and Asia, where leaders are actively reprioritizing issues and engaging stakeholders. Europe remains the most resilient against ESG politicization, with many companies unaffected and setting high standards for global ESG compliance.
While some see ESG as a tool for social activism, experts assert that its true role lies in managing risks and fostering long-term business value – one of several reasons why we believe ESG is here to stay.
ESG as a Measure of Long-Term Business Health
ESG is increasingly recognized not as a moral judgment but as a critical tool for “managing material risk factors to ensure long-term value creation.” It adds an essential layer to investment analysis, providing insights into how a company handles crucial issues such as climate impact, pollution, labor practices, customer relations, supply chain management, and reputation—all of which can significantly affect a company’s bottom line.
Consider two companies in the same sector with similar revenue and expenditure, but with one key difference: one has high employee turnover and safety management concerns, and the other has high employee retention and strong safety measures. An investor would likely prefer the latter, reflecting how robust ESG practices are seen as indicative of better long-term investment potential. Similarly, a company proactive in reducing carbon emissions is generally viewed as a more secure investment compared to one neglecting these concerns. ESG factors are increasingly recognized as vital for assessing business risks and opportunities, impacting stock prices and overall enterprise value.
The financial markets have long recognized that financial metrics alone do not provide a complete picture of a company’s health. Investors are now more focused than ever on non-financial drivers—like ESG factors—that influence long-term value creation. Moreover, strong ESG performance can lead to opportunities for growth, cost reductions, risk minimization, higher employee engagement, and improved returns on investment, making companies more resilient and better positioned for long-term success.
ESG Standardization and Improvement
Momentum is building globally for more unified ESG reporting standards, with major strides toward standardization and clarity. The International Sustainability Standards Board (ISSB) is developing a comprehensive ESG reporting framework .to consolidate the numerous existing standards, aiming for more streamlined and consistent disclosures. This effort will likely lead to a shift from voluntary to mandatory ESG disclosure, particularly in regions lacking clear regulations.
As noted in our previous post on the top 5 U.S. ESG trends for 2024, the push for standardization and regulation is accelerating. In the U.S., where regulatory clarity is still evolving, ISSB’s sustainability standards are becoming increasingly vital for companies to meet growing investor and market demands. Emily Pierce, Chief Global Policy Officer at Persefoni and former SEC official, emphasizes that “investor and commercial expectations for information are here to stay, and regulations in other jurisdictions will accelerate the pressure on U.S. companies to keep up.”
Notably, the European Union’s Corporate Sustainability Reporting Directive (CSRD), introduced in 2022, represents the most extensive sustainability disclosure legislation globally. It aims to improve the quality and comparability of non-financial data, aligning ESG reporting more closely with traditional financial standards. As these universal reporting standards take effect, companies will face increased pressure to adopt practices that not only benefit society but also enhance profitability.
Global Embrace of ESG by Investors and Executives
Recent trends indicate that ESG funds are not only holding their ground but are often outperforming traditional funds. Our earlier analysis of Morgan Stanley’s 2023 report highlighted that, over the past five years, sustainable investments have consistently matched or exceeded the returns of conventional funds.
This growing recognition of ESG’s financial benefits is reflected in the enthusiasm of investors and executives worldwide. A recent Bloomberg survey of 500 executives and investors from the U.S., Europe, and Asia-Pacific reveals that 89% view ESG metrics as mainstream, and 57% believe the “ESG” label remains relevant. Bloomberg’s research further shows that ESG is seen as a key driver of profitability, competitiveness, and brand value, with 85% of investors agreeing that it leads to better returns, more resilient portfolios, and enhanced fundamental analysis. This trend underscores that ESG is not merely a passing trend but a crucial element for long-term business success.
With ESG principles now central to both investment success and corporate strategy, it’s evident that ESG is here to stay.
At EGÉA SRI, we specialize in helping individuals invest responsibly, tailoring investments to our customers’ values. Contact us today for a consultation and let us help you grow your portfolio sustainably!
