A recent ISS report, “ESG Matters,” explores how a company’s financial performance can be linked to its ESG activities. The report was written by Dr. G. Kevin Spellman, an ISS EVA senior advisor and the David O. Nicholas Director of Investment Management and senior lecturer at the University of Wisconsin-Milwaukee.
More profitable firms have the resources to invest in areas that positively influence ESG, it could also be that profitability rises when a company manages its material ESG risks, or it could be a little bit of both. If it is a little bit of both, then this means that good-ESG initiatives improve financial performance, which then provides the monetary resources to invest to be an even better-ESG firm, which then drives up performance again.
People may choose not to invest in a firm that has poor ESG, thereby limiting its access to capital and raising its cost of capital. Firms that get in trouble on the environment may be distracted by the regulatory headache (higher costs) and customers may avoid the firm (lowering revenue). If one does not treat employees right, this could lower morale, increase turnover, and therefore lower productivity.