For businesses, sustainability has long been viewed as a luxury investment. In order to get businesses to implement sustainable practices, the value creation derived from sustainability needs to be clearly communicated to stakeholders.
Research from the consulting firm McKinsey shows how the playing field has changed over the years and how sustainability practices are directly tied to a business’s financial success.
According to research by Deutsche Bank, which evaluated 56 academic studies, companies with high ratings for environmental, social, and governance (ESG) factors have a lower cost of debt and equity;
89 percent of the studies they reviewed show that companies with high ESG ratings outperform the market in the medium (three to five years) and long (five to ten years) term. The Carbon Disclosure Project found something similar.
Companies in its Carbon Disclosure Leadership Index and Carbon Performance Leadership Index, which are included based on disclosure and performance on greenhouse-gas (GHG) emissions, record superior stock-market returns. Companies in the Carbon Disclosure Leadership Index substantially outperformed the FTSE Global 5004 between 2005 and 2012. Companies in the other index also did better.
Additionally, a study from the International Finance Corporation/The World Bank showed a direct link between companies’ environmental, social, and corporate governance practices (ESG) and their financial performance.
IFC recently looked at the performance of 656 companies in our portfolio and found that companies with good E&S performance tend to outperform clients with worse environmental and social performance by 210 basis point (BPS) on return on equity (ROE) and by 110 bps on return on assets (ROA.)
Clients with high E&S scores outperformed by 130 bps the MSCI Emerging Market Index—an index created to measure equity market performance in global emerging markets. Whereas a deterioration in E&S performance resulted in worse financial performance.
Sustainability not only benefits the environment, it benefits a company’s bottom line.