Corporate ESG performance can directly affect market valuation – Deloitte

A review of the evidence from consulting firm

Companies’ environmental, social and governance (ESG) performance can have a direct impact on their market valuation, according to a new study from consulting firm Deloitte.

The report – Finding the Value in Environmental, Social and Governance Performance – highlights that short-term ESG issues and events, including human rights issues, product recalls, boycotts and protests often trigger the strongest and most immediate impact on stock prices.

Deloitte says: “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.”

The review shows that companies that are demonstrably prepared for ESG shocks can better mitigate the downside risks when they occur – which makes ESG disclosure “all the more critical, because it can help attract and retain investors and establish the long-term value of ESG management”.The 15-page report was written by Deloitte sustainability researchers Dinah Koehler and Eric Hespenheide. The latter sits on the World Business Council for Sustainable Development, the Global Reporting Initiative and the International Integrated Reporting Committee.

They write: “To increase and maintain investor confidence, [corporate] managers need to show how they are prepared to respond to ESG shocks and prevent them from turning into a longer-term problem.

“This means disclosure of ESG outputs (e.g. reporting of emissions) and clearer explanation of how ESG risks – the often unintended consequences of various ESG outputs – are identified, assessed in terms of their materiality to business value, and managed.”

And they add that historical information on ESG outputs matters because it can be predictive.

“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,” says Koehler.