ESG doesn’t have to be a yield killer – quite the contrary

When Nobel laureate Milton Friedman argued some 50 years ago that “the only social responsibility of business” is to “increase its profits,” the world was a different place. Climate change and the lack of natural resources have inspired a rethink.

Prerequisite for long-term success

Aligning business practices with environmental and social aspects as well as business management (environmental, social, and governance – ESG) is increasingly being seen as a prerequisite for successful long-term business activity.

In addition to this, political, organizational, and governmental targets exist, such as the United Nations’ Plan of Action for People, Planet, and Prosperity, agreed upon by the Member States in 2015, which serves as a guide to achieving the 17 Sustainable Development Goals (SDGs). There is also the European Union’s Action Plan for Sustainable Finance, which aims to pave the way for a climate-neutral Europe. It not only has the potential to exert significant influence over corporate activities and investment decisions, but also to improve transparency for investors when it comes to sustainable investments.

Does ESG create additional yields?

Social and political change is increasingly also having an impact on the financial and capital markets. There is still a deep-rooted sentiment among investors that those who do good for the climate and society will have to reckon with lower yields.

However, various studies have shown that aligning business practices with ESG often creates better long-term financial results in various areas than those of companies with no ESG alignment – for example, in the areas of sales growth, return on shareholders’ equity, or return on invested capital (ROIC). In addition, risks are often better accounted for.

Furthermore, studies have also shown that a strong negative correlation exists between a company’s ESG ratings and the volatility of its shares, meaning that shares of sustainably operating companies are often less volatile. Investors are starting to become wise to the fact that the market share of ESG-oriented products has been growing for years. If the various action plans manifest themselves in specific laws and regulations, companies that prioritize ESG criteria may well experience increased positive effects on their financial success in the future. Companies that decided at an early stage to manage their business according to ESG criteria could benefit from this.

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