Sustainability and corporate cost of capital

The report sets out that lower cost of capital is a fundamental measure of risk. The analysis summarises the correlation of high scores in sustainability matters with lower cost of capital (equity, as well as loans and bonds). It found five academic studies that have analysed these metrics since the 2008 market disruption. The conclusion singles out that superior risk-adjusted returns for investors can be attained when taking the right approach towards sustainable investment.

Sustainability and corporate financial performance

The report notes that previous studies on the financial benefits of responsible investing have been inconclusive, so it provides a more detailed analysis, breaking down ESG into their own respective components. It analyses 372 academic studies which include security and fund markets across various regions and periods. The analysis of the combination of industries may not have as much meaning as they may vary greatly with environmental risks to one industry being more evident than in another. The report shows how governance measures are strongly linked to a corporation’s financial performance and recommends that ESG factors should be disassembled, and governance factors studied first before any other factors.

The importance of ESG in investment decision making

The report states that investors are taking more of an interest in ESG matters whilst adding that fund managers that have integrated this information into their investment process have outperformed. Research shows fund managers may struggle to capture the full value of ESG data, but they have rarely underperformed in incorporating these factors.

Integrated reporting

The report highlights the importance of Integrated Reporting (IR) with more than 2,000 companies releasing annual sustainability reports. The analysis of these reports shows that many companies are providing insufficient data on some aspects of their operations. The report states that ESG consultant companies play an important role in ensuring the accuracy and transparency of information on sustainability risks and opportunities.

Recommendations

The report recommends that companies and investors should consider long-term opportunities and risks when investing in these matters. It highlights the use of better policies, procedures and a long-term approach as the best way to ensure constant engagement in sustainable investing. The disaggregation of ESG factors is recommended, and Integrated Reporting should reflect ESG risks that have the potential of influencing a corporation’s long-term performance. It concludes that fund managers should work to capture the outperformance that could come from sustainable investing.

Overall, the report confirms the growing interest in ESG information among investors as the correlation between corporate financial performance and sustainability continues to improve. The report advises companies, investors, and ESG consultants to continue promoting sustainable investing while highlighting the increasing importance of transparent and accurate ESG information.