Deloitte Report Details Effects of ESG Performance on Market Value
According to a new Deloitte report, an organization’s environmental, social and governance (ESG) performance can directly and indirectly impact its market valuation. The report reveals both short and long-term implications of ESG management.
The report 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. As the news media continues to discuss an organization’s ESG crisis, this can further erode shareholder confidence.
“ESG issues are particularly vexing because they can arise anywhere in a company’s value chain. Many ESG risks – from labor protests and safety concerns to ecosystem damage – are embedded in vast corporate supply chains, where they are getting more attention,” said Eric Hespenheide, a partner at Deloitte & Touche LLP who serves as audit and enterprise risk global leader for Deloitte’s Sustainability practice. “For many companies, these are often reputation risks – guilt by association – rather than direct operations or financial risks, and these risks cannot simply be outsourced.”
While investor decisions can be influenced by a company’s ESG disclosure around the time of a crisis, there is less convincing evidence that ESG performance leads to higher stock returns over the long-term. This may be a result of only small incremental ESG program shifts or reporting that does not resonate directly with investors, who may not consider the information in their buy/sell decisions. For companies to protect themselves against ESG crises when they arise and to be rewarded by investors for their ongoing ESG management efforts, they need to consider whether to disclose information that explicitly ties these efforts to reductions in exposure to ESG risks.
Deloitte’s report highlights how and why ESG performance is expected to continue to be a consideration in financial valuation and several reasons risks may play an increasingly important role on performance:
- The average investor is paying more attention to ESG information, especially related to downside risks.
- Volatility in the global business environment due to financial risks, regulatory uncertainty, extreme weather and social unrest are all more critical and persistent than previously thought.
- Today’s lean supply chains are often brittle and vulnerable to disruption because supply chain managers may be too focused on efficiency.
- The rise of social media rivals the impact of public politics and regulatory processes.
“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,” said Dinah A. Koehler, a senior research manager with Deloitte Services LP and coauthor of the report.
The other reports in this series include: “Disclosure of Long-Term Business Value,” which highlights the intangible value of ESG; “Drivers of Long-Term Business Value: Stakeholders, Stats and Strategy,” which demonstrates how ESG commitments influence stakeholder.
Read the “Finding the Value in Environmental, Social and Governance Performance” report.