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The ESG premium: New perspectives on value and performance

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In a new survey, executives and investment professionals largely agree that environmental, social, and governance programs create short- and long-term value—though perceptions of how have changed over the past decade.

Pressure on companies to pay attention to environmental, social, and governance (ESG) issues continues to mount. Researchers, business groups, and nongovernmental organizations have variously warned of the risks—or emphasized the opportunities—that such issues present to company performance. 1 Most executives and the investment professionals who scrutinize their companies seem to agree that ESG programs affect performance.

In our latest McKinsey Global Survey on valuing ESG programs, 2 83 percent of C-suite leaders and investment professionals say they expect that ESG programs will contribute more shareholder value in five years than today. They also indicate that they would be willing to pay about a 10 percent median premium to acquire a company with a positive record for ESG issues over one with a negative record. That’s true even of executives who say ESG programs have no effect on shareholder value.

Among respondents who say that such programs increase shareholder value, perceptions of how the programs do so have shifted since our survey on the subject in 2009. 3 A majority of these business leaders and investment professionals now say that environmental, social, and governance programs individually create value over both the short term and the long term. Moreover, the perceived long-term value of environmental and social programs now rivals or exceeds the value attributed to governance programs.

Burgeoning interest in companies’ ESG performance has resulted in a proliferation of reports, rankings, requests from investors and analysts, and other mechanisms for transparency. The responses to this survey show a fairly universal desire from investors and executives to improve on the current approaches and create easier-to-use ESG metrics and data standards. It isn’t possible—or worthwhile—to report on everything, but companies can focus on communicating the most critical information in ways that key stakeholders value. Investment professionals especially want ESG data that are more standardized, better integrated with financial data, and readily bench marked. Such data could also benefit ESG leaders within companies, who might use the data to catalyze change internally. For example, the scenario planning required by the Task Force on Climate-Related Financial Disclosures (TCFD) standards can help with managing climate- change risks.

This article was originally published on the McKinsey & Company’s website.

Date: February 12, 2020

Author: Lindsay Delevingne; Anna Gründler; Sean Kane; Tim Koller

Tags: ESG Strategy, McKinsey

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