Below is an excerpt from ISS-Corporate’s recently released paper “The Importance of Being Prime: A Financial Fact for Serious Companies”. The full paper is available for download from the ISS-Corporate online library.
KEY TAKEAWAYS
- Benchmark for Sustainability Performance: The ISS ESG Corporate Rating methodology establishes a robust benchmark for assessing sustainability performance, emphasizing materiality and incorporating considerations of value chain impacts, due diligence, management systems, and adherence to standards of responsible business conduct.
- Sustainability Link to Financial Performance: Companies with strong sustainability performance (designated as “Prime”) demonstrate superior financial outcomes, including higher profitability, better overall financial quality, and reduced stock price volatility, when compared to those with weaker sustainability performance.
- Cost of Capital Advantage: Leading sustainability performers also benefit from consistently lower costs of capital compared to the broader universe of companies, highlighting the tangible financial benefits of sustainable business practices.
- Benefit of Disclosure Enhancements: Strengthening the alignment between sustainability actions and disclosures can enhance corporate value, as a strong ISS ESG Corporate Rating may send a positive signal to investors.
Oscar Wilde’s The Importance of Being Earnest, famously subtitled “A Trivial Comedy for Serious People,” playfully critiques the superficiality of Victorian social conventions, as it explores what lies beneath the surface. Wilde invites his audience to question the value of outward appearances and labels – a challenge equally relevant in today’s business world as companies seek to define themselves through strong sustainability practices. In this spirit of discernment, ISS-Corporate explores the intersection of financial performance leveraging the ISS EVA framework and sustainability using the ISS ESG Corporate Rating methodology.
While Wilde’s play invites us to question the value of labels, the findings of our research suggest that leaders in sustainability, designated as Prime companies by ISS ESG, tend to exhibit higher profitability, stronger financial quality, and lower levels of financial risk, which may send a strong signal to investors and capital markets. These companies also have consistently shown a lower cost of capital over time compared to the broader universe of companies.
The results of the analysis suggest that a strong sustainability performance is more than just a title or label – it is intrinsically linked to financial outcomes. Businesses that prioritize sustainability demonstrate measurable advantages, helping companies build resilient businesses and attract capital.
By:
Rudy Kwack, CFA, Associate Vice President, Sustainability Advisor, ISS-Corporate
Kosmas Papadopoulos, CFA, Executive Director, Head of Sustainability Advisory – Americas, ISS-Corporate
