Evermonte Insights

The relationship between ESG practices and the creation of market value


The structuring of an environmental, social and governance (ESG) proposal that is adequate and consistent with reality is directly linked to the creation of market value. If, before, the individual performance of organizations was enough to foster their growth, today, continuous profitability comes from isolated strategies and the concern with the global context becomes fundamental. Thus, ESG practices include the following factors:

  1. Environmental (E): concerns environmental issues and, above all, the balance between harm and benefits caused by organizational action;

  2. Social (S): this criterion refers to working conditions, health and safety, conflict resolution, diversity, inclusion and relationships established between the organization and its employees;

  3. Governance (G): the theme of governance is related to internal aspects of the organization, including executive compensation, board diversity and structure, as well as tax strategy.

The companies’ commitment to ESG practices demonstrates a perspective for the future based on sustainability and the development of increasingly solid relationships between stakeholders. In addition, according to the Harvard Business Review, there has been a significant increase in investor interest in companies that have a high ESG performance rating or are working to improve their ratios.

However, although the interdependence between financial and social performance has a significant influence on corporate earnings, assuming ESG commitments that are incompatible with organizational reality tends to generate equally relevant inconsistencies. Therefore, it is imperative that leaders identify and face the contradictions present in the corporations in which they operate, in order to undertake the necessary changes to fulfill the objectives established in the ESG Agenda.

So, how to create value from a sustainable performance?

The Journal of Sustainable Finance & Investment points out, in one of its surveys, that paying attention to environmental, social and governance issues does not compromise returns, on the contrary. Results from nearly 2,000 studies on the impact of ESG proposals on stock returns found a positivity rate of 63%. For McKinsey & Company, it is of paramount importance that leaders understand the ways in which a solid environmental, social and governance proposal is linked to the creation of market value:

  1. Revenue Growth: creating compelling ESG practices makes it easier to enter new markets and expand into current ones. Confidence in corporate players also increases the chances of negotiating and approving significant projects;

  2. Cost reduction: ESG helps to reduce operating costs and can, according to a McKinsey study, affect profits related to operations by up to 60%, considering, above all, the reduction of water waste, the use of renewable energies and the promotion a healthy work environment;

  3. Mitigation of legal and regulatory interventions: the strategic freedom provided by implementing ESG practices reduces regulatory pressure and mitigates the risks of adverse government actions. Also, considering that up to 1/3 of corporate profits are subject to state intervention, this can be a really significant output in terms of compensation;

  4. Greater team productivity: structuring a healthy work environment, as well as hiring qualified professionals (that is, based on a well-constructed ESG proposal), increases employee motivation and their sense of purpose. The awareness that sustainable action goes beyond making profits also provides greater job satisfaction, since recognition boosts productivity;

  5. Optimizing Assets and Investments: with the ESG Agenda, investing in sustainable opportunities is not only smart, but necessary. By avoiding sunk investments due to issues of climate urgency and reallocating them to balanced and potentially profitable contexts, the ROI rate will remain in continuous growth.

Given this, the relevance of ESG practices for creating market value can be proven with the corporate data itself. The strategic harmony between the organization’s business model and its long-term choices is also essential for successful companies to be able to boost their expansion through assertive and beneficial initiatives for the environment.

The focus on governance

ESG practices require a long-term commitment to ethical and sustainable initiatives. However, it is necessary to balance the actions related to its three criteria (environmental, social and governance). It is not enough to adhere to the annual ESG Agenda without there being a real commitment from governance with its objectives. Despite its expressiveness for the corporate market, what are the main points for ESG to become a reality within organizations?

  • Specificity: each niche must address its specific needs, considering the objectives it wants to achieve and the possibilities of putting them into practice. However, according to McKinsey editor Henisz, regardless of the company’s circumstances, it’s up to the CEO to garner support for the initiatives that best align with his mission;

  • Practicality: the CEO needs to have value creation as a central message;

  • Realistic perception: if necessary, recognize bad results and reorganize processes in order to prevent the drop in value;

  • Transparency: communicating the results of ESG actions prudently and transparently can promote long-term market value.

As such, ESG practices should be thought of as a long-term growth plan. They maximize value creation based on strategic planning and systematic action, seeking to meet the interests of different stakeholders by building a reality where profitability and sustainability go hand in hand.

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