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Why Investors Prefer Companies Committed to ESG

March 25, 2020

For many years, sometimes even among advocates for environmental issues, there has been doubt about the financial benefits of sustainability. This was in some ways a part of the socially responsible investing (SRI) philosophy—that sustainability in business was a matter of acting ethically, which sometimes came at the cost of financial performance. 


But it’s now clear that idea is no longer the common or mainstream view in finance. More and more investment firms, including the largest in the world, believe that a focus on environmental, social and governance (ESG) and increased sustainability will in fact improve your financial valuation. 


BlackRock Goes All in On ESG

In his recent 2020 Letter to CEOs, Larry Fink, chairman and CEO of BlackRock, said that the investment firm will begin to consider ESG issues as a core investment criteria. It was a major moment for sustainability in finance.


BlackRock, the largest asset manager in the world, had generally avoided taking outright stances on sustainability previously, though Fink had perhaps built up to this point in previous Letters to CEOs. In 2018, for instance, he said that “without a sense of purpose, no company, either public or private, can achieve its full potential.” Yet in the years following that letter, BlackRock still faced mounting criticism and protests by environmental activists. 


Fink framed the 2020 announcement as a financial one, rather than a political one. 


“Climate change has become a defining factor in companies’ long-term prospects,” Fink wrote. “Last September, when millions of people took to the streets to demand action on climate change, many of them emphasized the significant and lasting impact that it will have on economic growth and prosperity – a risk that markets to date have been slower to reflect. But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.”


The Broader Investor Movement Toward ESG

Fink’s announcement is a major step in the industry, but it’s part of a much larger change in finance. Last year, Robert G. Eccles and Svetlana Klimenko interviewed 70 senior executives at 43 global investing firms for an article in Harvard Business Review. They found that “ESG was almost universally top of mind for these executives.”


There are a variety of reasons. For one, as investment firms grow in size, there is “no hedge against the global economy.” Yet of all the reasons cited – higher returns, growing demand, and more – they are nearly all fiduciary. None of the reasoning stems from purely environmental concerns.


How Companies Can Get Started With ESG

Many companies have ambitions to begin a sustainability plan, but don’t know where to begin. Enel X covered the process in our Sustainable Energy Strategy guide, which suggests the World Business Council for Sustainable Development’s guidelines for an integrated energy strategy as a starting point. BlackRock suggests the UN’s Sustainable Development Goals (SDGs) as well, and also encourages companies to adhere to the KPIs in the guidelines of the Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB), whom we also discuss in our guide.


The process is difficult without an integrated strategy, so make sure you have a clear approach and full buy-in before beginning.


A Focus on ESG Produces Better Returns

These decisions are not merely ethical, but instead reflect a growing belief that companies will not thrive without ESG commitments. In the Harvard Business Review survey, they noted that financial returns are one of the main reasons for the change in investment practices.


“Many corporate managers still equate sustainable investing with its predecessor, socially responsible investing (SRI), and believe that adhering to its principles entails sacrificing some financial return in order to make the world a better place,” Eccles and Klimenko write. “That view is outdated.”


They cite several large-scale studies in the article to support the notion that a company that is committed to ESG will outperform those that are not, even rigorously controlling for these companies’ size. Indeed, the energy companies in the S&P 500 (which features traditional energy giants like Exxon Mobil and Chevron) was the S&P 500’s worst performing sector in 2014, 2015, 2018 and 2019, as the Wall Street Journal notes, and Bloomberg notes that energy was the worst performing sector in the 2010s by a wide margin.”