5 Ways That ESG Investing Creates Shareholder Value

ESG investing Asia buy

Billy Toh

September 21, 2022

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ESG investing is an investment strategy that focuses on financial assets that create a positive impact on society at large.

The ESG stands for Environmental, Social and Governance concerns. As most businesses are also affected by ESG, it makes sense that investment that offers strong ESG propositions will create value to shareholders.

ESG is an opportunity to build resilient and sustainable business models that will drive value creation for shareholders.

So, here are five ways how ESG investing can create long-term business value that will benefit investors.

1. ESG boosts customer loyalty and safeguards brand integrity

ESG can have a positive impact on brand reputation. Customer-facing companies will find that consumers are increasingly more willing to pay to “go green”.

To attract new customers and retain their existing client base, businesses need to align its services, products and customer offerings with its broader ESG priorities.

This is as customers are increasingly aware of ethical spending and care more about how businesses support sustainability.

2. Improve company’s profitability

While the implementation of ESG-focused programmes could lead to a near-term increase in costs, profitability could actually increase in the long term.

This as the shift towards sustainable sourcing and investment into research & development (R&D) will help to optimise the usage of such resources.

Studies have shown that companies with strong ESG propositions spend more on R&D but less on capital expenditures.

The streamlining of resources enables reductions of water and energy consumption, as well as the elimination of harmful waste.

3. Mitigate risks

Companies with strong ESG practices also help to build a strong track record.

This is as the strong focus on corporate governance will reduce risks across the spectrum; everything from fraud to litigation and other reputational issues.

For example, German automaker, Volkswagen Group’s reputation was affected back in 2015 during its emissions scandal, sometimes known as “Dieselgate” or “Emissionsgate”.

The scandal over Volkswagen cheating pollution emissions tests in the US cast a negative cloud over the automotive industry at that time.

This is where strong ESG practices will be important to ensure integrity and protect a company’s reputation and track record.

4. More attractive to lenders and investors

One of the biggest advantages of having a strong ESG programme in place is the ability to attract funding.

Both lenders and investors are increasingly paying attention to ESG performance as a criterion in determining which companies to invest in or extend credit to.

This is in line with growing public concerns on issues related to climate change and abuse of natural resources.

Companies with a strong focus on sustainability will be more appealing to both lenders and investors.

5. Attraction and retention of talent

Just as customers are becoming more aware of the importance of sustainable practices among companies, employees are looking to work for organisations whose values align with theirs.

As the battle for talent heats up, companies with strong ESG profiles are likely to have greater success with their recruitment and retention programmes, especially with younger generations.

ESG promotes growth and improves financial performance

A comprehensive focus on business and ESG programme will benefit companies in terms of growth and their financial performance over the long term.

This is why we’re seeing a shift towards ESG investing. As an investor, I believe it is vital for companies to create value.

While traditionally, value has been focused on maximising profit for shareholders, access to information has helped investors to look beyond mere profitability as a metric of success.

In order to build a resilient business model that add values to shareholders over the long term, businesses need to responsibly manage issues related to ESG.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

About the Author: Billy Toh

Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.