ESG metrics have become a critical part of sustainable investment decision-making. #RefinitivSocial100 influencer and GC GlobalNet founder, Kevin L Jackson, examines the link between ESG data analytics and long-term shareholder value.
- The ever-increasing amount of data on sustainable business is helping investors to uncover linkages between ESG and long-term investment viability.
- Research reveals the outperformance of stocks that rank well on various ESG metrics, showing the potential to maximize shareholder value.
- To gain a proper understanding of new ESG-related business models and associated risk, investors need to confirm the provenance of their ESG data.
Big data analytics creates new business models and takes an enlightening look at old ones.
A domain in which this useful capability is turning heads is environmental, social, and governance (ESG) investment. ESG represents three critical factors to business risk and continuity, which are themselves advance indicators of long-term investment viability.
By measuring the sustainability and societal impact of an investment in a company or business, this type of analysis can:
- Quantify the contribution a company makes to society’s environmental health (climate change, greenhouse gas emissions, waste management, energy efficiency).
- Help ensure the protection of human rights (supply chain labor standards, illegal child labor, workplace health and safety regulations).
- Establish corporate principles that define rights, responsibilities, and expectations among the company’s stakeholders.
The ever-increasing amount of data that can be obtained and analyzed at low cost is also uncovering the intricate linkages between ESG and business profitability.
Maximizing shareholder value
A recent study by Bank of America Merrill Lynch Global Research showed that an investor that rigorously followed a strategy of buying stocks that ranked well on various ESG metrics would have beaten the broader market by up to three percentage points a year over the past five years.
Surprisingly, this analysis shows that a focus on ESG could also maximize shareholder value.
It was an honor to have the opportunity to share my thoughts on #data in the #FinTech industry with @Refinitiv during their pre-#WEF20 workshop in #NYC.#RefinitivSocial100 Top 100 Influencers in Finance: https://t.co/aWuw0k3d78 #TrustedData #Davos2020 #SustainableLeadership pic.twitter.com/3WOHNIxnjo
— Kevin L. Jackson – Educate. Consult. Engage. (@Kevin_Jackson) January 18, 2020
A Refinitiv study reinforces this viewpoint by revealing that the number of companies that link executives’ compensation to sustainable targets has more than doubled in the last three years.
Other positive ESG trends include:
- Board gender diversity has increased from 15.5 percent to 18.6 percent in three years.
- Sixty-three percent of companies within Refinitiv’s ESG database, which covers 70 percent global market cap, have policies to reduce emissions (up from 56 percent five years earlier).
- The number of companies utilizing external auditors for their sustainability reporting has increased from 21 percent to 25 percent in three years.
The study also shows that 52 percent of Refinitiv database companies report on the environmental policies of their suppliers.
The value of using ESG metrics
The broader financial services industry is now recognizing ESG metrics as critical business investment factors. This realization is also top of mind as the world attempts to deal with the coronavirus outbreak and its extended effects on global supply chains and the global economy.
Current European investment into ESG is massive. It’s also growing in the United States.
In an interview with CNBC, Managing Director and Global Head of Exchange-Traded Funds at Invesco, Dan Draper, agreed that investments in socially acceptable businesses such as clean technologies are now reaching the economies of scale needed for profitable investment.
Such investments have also been associated with reduced business costs and strong consumer support.
Checking on corporate progress
This good news doesn’t, however, mean that everything is safely in place when it comes to corporate ESG progress.
The study also shows that at the current rate of change, gender equality will not be reached for decades into the future. Corporate executive compensation schemes will also remain primarily tied to shareholder returns and short-term financial targets.
As investors continue to identify ESG as important to their portfolios, they can rely on companies like Refinitiv to provide the ESG data and to confirm the provenance of that data.
Gaining a proper understanding of ESG-related business models and associated business risk is critical.