Written by Guido Zilli, Sustainability Director at Gruppo Dani and greenLIFE project coordinator.
Is corporate sustainability a bridge to business success? Figures seem to confirm that it is.
Let’s have a look at it.
Most “conscious” companies integrate Environmental, Social and Governance factors – ESG – within their management practices.
In some cases, practices evolve and transform to become a cornerstone of corporate strategy.
This is not a naive vision of a business but an awareness that sustainable management and a positive and proactive role of companies in an increasingly complex, uncertain, dynamic context is crucial to gain a competitive advantage.
ESG COMPANIES PERFORMANCE
Several researches discovered a positive relation between business profitability and ESG rating.
Among these, a 2018 analysis conducted by the Politecnico di Milano – Department of Engineering Management and Banor SIM, examined the companies included in the Stoxx® 600 index, representing 600 stocks belonging to 17 European countries.
In the period 2012 – 2017, companies belonging to the quartile with the highest ESG rating showed an average annual performance of 13.2%, against 12.3% and 11.3% of companies with medium and low ESG ratings, without detecting significant differences in the volatility of returns; an expression of the level of risk.
By restricting the analysis to companies in the industrial sector, the authors noted that the companies with high ESG ratings were the best performers in terms of revenue growth and increased margins.
This supports the idea that a management which is attentive to environmental, social and governance aspects is still able to generate more than satisfactory income and positive financial results.
EXTREME EVENTS AND RESILIENCE OF ESG COMPANIES
More interesting evidence has been revealed by investment company, Blackrock. This takes a focus on the global results of the main ESG indices compared to the corresponding non-ESG indices during the first four months of 2020, already in full Covid-19 emergency.
At the same level of risk, almost 90% of the ESG indices performed better than their non-ESG counterparts, confirming the results already observed during previous market recessions. These results seem to confirm the resilience of companies with good ESG ratings, which appeared to be better equipped to cope with challenging situations. Also, in this case, a positive correlation emerged between ESG ratings, quality of customer relations, staff satisfaction, effectiveness of decision-making processes, corporate culture and corporate performance. This suggests that an overall approach is preferable than a focus on specific areas.
COST OF DEBT AND ESG ENTERPRISES
Even when it comes to access to debt, companies with high ESG ratings seem to find more favourable conditions than the average.
It is worth noting that the conditions of access to credit are influenced by external factors related to the national and sectoral context in which a company operates; it is reasonable to assume that companies belonging to sectors characterized by a high carbon footprint will pay higher interest rates.
That said, ESG firms typically have better risk awareness and risk management capabilities which can be linked to a better debt repayment capacity and, therefore, a lower risk premium.
In this context, cases of companies which have taken out loans that link the cost of debt to sustainability performance are interesting. In 2017, Philips negotiated a five-year loan of €1 billion with a consortium of banks that links the change in interest rates to the annual sustainability performance. When the latter go up, rates go down and vice versa.
SOME FINAL CONSIDERATIONS
Communities are expecting companies to be increasingly attentive to environmental and social aspects, to commit not only to economic objectives, but also to social and environmental goals.
Investors, financial institutions and, in general, those who are interested in investing (directly or through intermediaries) in companies, will look for an increasingly complex range of information to understand the long-term prospects of a business to make wise choices.
Businesses will be required to be increasingly transparent, open to dialogue and able to communicate. Tools such as the sustainability report, methodologies for calculating the climate footprint such as the Life Cycle Assessment, the materiality analysis and the environmental product certifications will be more and more requested, in order for companies and investors to direct and monitor business choices and to communicate commitments and results to stakeholders.
Companies need to improve their ability to think and act as multidimensional social institutions in order to evolve successfully and make a positive contribution to society and the environment. They will need to combine and nurture the protection of natural resources, enhancement of their employees wellbeing, promote social and territorial inclusion while looking at their investments profitability.