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Chapter 7. The Financial Impact of Effective (or Ineffective) ES&G/Sustainab...

7. The Financial Impact of Effective (or Ineffective) ES&G/Sustainability Management

This chapter reviews and discusses the financial impact of effective ES&G practices, from a theoretical standpoint and on the basis of what has been demonstrated through empirical, published research. This discussion builds on the concepts and terms introduced in the preceding chapter and demonstrates how financial market actors have evaluated and judged the outcomes of corporate ES&G activities. This chapter illustrates how economic and market theory and the bilateral relationships between capital markets and corporate ES&G practices have been expressed over the past 20 years or so. I explore what is believed and what is known about how making investments in ES&G improvements directly affects the firm’s financial performance. I also look at how a lack of attentiveness to these issues can increase the firm’s risk profile and costs and otherwise erode its competitive position and long-term sustainability. Finally, I review information on the beliefs and attitudes of market participants regarding the financial impacts of ES&G posture and performance, including increased profitability and returns to the investor.

In keeping with the approach used throughout this book (and in my consulting practice), the relationships I postulate are based on facts and empirical analysis. Numerous theories and beliefs in the expanding marketplace of ideas address the “value” created by disciplined investments in ES&G improvements. In sorting through these often competing ideas, I believe that the most rational way forward is to focus on what has been proven and/or can reasonably be inferred from evidence, rather than ascribing financial or other benefits to activities based solely on theory (or wishful thinking). Similarly, although examples and anecdotal experience can be interesting and highly relevant, it is fundamentally difficult to build a compelling case in support of a new approach intended to challenge long-standing orthodoxy, such as that practiced in many corners of the capital markets, with such evidence. Accordingly, the focus in this chapter is limited to a discussion of what has been demonstrated in the published literature—specifically, well-designed studies of multiple firms, generally examined over an extended period of time.


  

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