2
Just as ESG is an inextricable part of how you do business, its individual elements are
themselves intertwined. For example, social criteria overlaps with environmental
criteria and governance when companies seek to comply with environmental laws
and broader concerns about sustainability. Our focus is mostly on environmental
and social criteria, but, as every leader knows, governance can never be hermetically
separate. Indeed, excelling in governance calls for mastering not just the letter of
laws but also their spirit—such as getting in front of violations before they occur, or
ensuring transparency and dialogue with regulators instead of formalistically submitting
a report and letting the results speak for themselves.
Thinking and acting on ESG in a proactive way has lately become even more pressing.
The US Business Roundtable released a new statement in August 2019 strongly
affirming business’s commitment to a broad range of stakeholders, including customers,
employees, suppliers, communities, and, of course, shareholders.
1
Of a piece with
that emerging zeitgeist, ESG-oriented investing has experienced a meteoric rise. Global
sustainable investment now tops $30 trillion—up 68 percent since 2014 and tenfold
since 2004.
2
The acceleration has been driven by heightened social, governmental,
and consumer attention on the broader impact of corporations, as well as by the
investors and executives who realize that a strong ESG proposition can safeguard
a company’s long-term success. The magnitude of investment flow suggests that
ESG is much more than a fad or a feel-good exercise.
So does the level of business performance. The overwhelming weight of accumulated
research finds that companies that pay attention to environmental, social, and
governance concerns do not experience a drag on value creation—in fact, quite
the opposite (Exhibit 1). A strong ESG proposition correlates with higher equity
returns, from both a tilt and momentum perspective.
3
Better performance in ESG
also corresponds with a reduction in downside risk, as evidenced, among other
ways, by lower loan and credit default swap spreads and higher credit ratings.
4
1
See “Statement on the purpose of a corporation,” Business Roundtable, 2019, opportunity.businessroundtable.org.
The stakeholder approach is elaborated upon in Witold J. Henisz, Corporate Diplomacy: Why Firms Need to Build Ties
with External Stakeholders (Routledge, November 2016); John Browne, Robin Nuttall, and Tommy Stadlen, Connect:
How Companies Succeed by Engaging Radically with Society (PublicAairs, March 2016); and Colin Mayer, Prosperity:
Better Business Makes the Greater Good (Oxford University Press, January 2019).
2
Global Sustainable Investment Review 2018, Global Sustainable Investment Alliance, 2018, gsi-alliance.org.
3
Mozaar Khan, George Serafeim, and Aaron Yoon, “Corporate sustainability: First evidence on materiality,” The
Accounting Review, November 2016, Volume 91, Number 6, pp. 1697724, ssrn.com; Zoltán Nagy, Altaf Kassam, and
Linda-Eling Lee, “Can ESG add alpha? An analysis of ESG tilt and momentum strategies,” Journal of Investing, Summer
2015, Volume 25, Number 2, pp. 11324, joi.pm-research.com.
4
See, for example, Witold J. Henisz and James McGlinch, “ESG, material credit events, and credit risk,” Journal of
Applied Corporate Finance, July 2019, Volume 31, pp. 10517, onlinelibrary.wiley.com; Sara A. Lundqvist and Anders
Vilhelmsson, “Enterprise risk management and default risk: Evidence from the banking industry,” Journal of Risk and
Insurance, March 2018, Volume 85, Number 1, pp. 12757, onlinelibrary.wiley.com; Erik Landry, Mariana Lazaro, and
Anna Lee, “Connecting ESG and corporate bond performance,” MIT Management Sloan School and Breckinridge
Capital Advisors, 2017, mitsloan.mit.edu; and Mitch Reznick and Michael Viehs, “Pricing ESG risk in credit markets,”
Hermes Credit and Hermes EOS, 2017, hermes-investment.com. Similar benets are found in yield spreads attached
to loans; see Allen Goss and Gordon S. Roberts, “The impact of corporate social responsibility on the cost of bank
loans,” Journal of Banking and Finance, July 2011, Volume 35, Number 7, pp. 1794810, sciencedirect.com; Sudheer
Chava, “Environmental externalities and cost of capital,” Management Science, September 2014, Volume 60, Number
9, pp. 2111380, pubsonline.informs.org; Sung C. Bae, Kiyoung Chang, and Ha-Chin Yi, “The impact of corporate
social responsibility activities on corporate nancing: A case of bank loan covenants,” Applied Economics Letters,
February 2016, Volume 23, Number 17, pp. 123437, tandfonline.com; and Sung C. Bae, Kiyoung Chang, and Ha-Chin Yi,
“Corporate social responsibility, credit rating, and private debt contracting: New evidence from syndicated loan market,”
Review of Quantitative Finance and Accounting, January 2018, Volume 50, Number 1, pp. 26199, econpapers.repec.org.