It is no longer news that full reporting and disclosure now goes beyond financial performance and position. In fact, one cannot divorce the financial performance and position of a firm from its exposures to operational hazards resulting from climate change, carbon emission and other sustainability concerns. Thus, transparent reporting on compliance with set policies on environmental, social and governance (ESG) matters are priority issues for responsible corporates because these matters drive the behavior of various stakeholders towards firms.
Moreover, businesses now operate under very volatile environmental and social conditions and their going concern statuses depend on their focus on ESG issues. In this article, we examine the impact of ESG on the growth and productivity of business organisations.
Impact of ESG on a Firm's Value
From the perspective of an investor, a firm's value (enterprise value) is usually viewed relative to its stock price (that is, the higher the stock price the higher the firm's value). However, shareholders usually view a firm's value through the lenses of profitability driven by the manpower capacity employed to ensure proper utilisation of resources for improved productivity. In other words, most shareholders would review a firm's income statement and weigh its financial performance in arriving at the enterprise value.
The two viewpoints above are not mutually exclusive because a firm's stock prices are bound to increase when the assets employed in the business operations are effectively used to improve its productivity and profitability. Moreover, possessing and implementing good ESG policies position firms for long-term success and this is exemplified with the following points:
- Investment attractiveness and sustainability: Private equity firms and other investors tend to give more attention to an extensive array of environmental issues and ethical practices before making strategic decisions on whether or not to acquire certain investment portfolios. To arrive at investment decisions therefore, they conduct relevant checks and due diligence to assess the level of compliance of their potential investee firms with the ideals of ESG. In other words, their investment decisions are driven by the ESG philosophies they imbibe coupled with the understanding that an ESG-compliant investee is more likely to better utilize both financial and non-financial resources. As such, investee firms that shop for investment partners may struggle to secure the most appropriate funds and funding partners if they do not pay necessary attention to the tenets of ESG and this may further portend danger to their overall sustainability into the foreseeable future.
- ESG propels additional growth by attracting new customers: Customers who focus on ESG considerations in their purchase decisions are more likely to seek products and services from companies that are focused on ESG. In certain cases, the acceptability of an organisation by the community can be as important as its ability to continue to exist and thrive. For instance, oil and gas companies operating in the Niger Delta region of Nigeria have at different times faced threats to the continuity of their businesses because of community issues. Sometimes, their employees are abducted and their businesses are placed on hold because of communal crisis that their ESG strategies could have proactively identified and relevant mitigants would have been developed for implementation.
- Retention of high-quality employees: ESG initiatives when properly implemented promote a high sense of purpose amongst employees. According to recent studies, more and more individuals are inclined to work with organisations that consider not only the financial gains of the business but the impact of the business operations on the social environment where it exists and how it manages potential adverse impacts these operations might have on the environment. The above employee behavior has a positive correlation with better productivity for the business since better quality employees are likely to be attracted to ESG-compliant organisations and are more likely to stay longer in the organisation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
