Companies that are measuring and managing their sustainability issues appear to perform better over the long-term in the capital markets. This is one of the important takeaways from a recent analysis conducted by the Governance & Accountability Institute [G&A], of the possible positive associations of increased corporate disclosure and reporting on ESG performance.
Senior corporate managers are interested in gaining advantage in the capital markets and leaders in sustainability management and reporting appear to enjoy increases in share price, lower cost of capital, better risk management profile, inclusion in favorable opinions and popular equity indexes, and more competitive advantages and opportunities.
Who Does ESG Performance Matter To?
So the critical questions: does clear focus on a company's ESG strategies and performance, and structured reporting on sustainability performance matter to investors? To reputational list creators? To creators of important corporate ratings and rankings?
The answers we found to all three stakeholder groups was a resounding yes across the board – there is positive association with each of these, at least for large companies included in a key stock market index. The team at G&A Institute also found clear differentiation between S&P 500 sustainability reporters and companies that do not report. Why the S&P 500 as a critical test?
Analyzing the Impact of ESG Performance: The S&P 500
Because the S&P 500 Index is widely used as a benchmark by asset owners and managers to track their performance. Wall Street managers like to say "The market is the market," indicating that it is a challenge for investors to beat the market in stock picking and to achieve outperformance of the assets they manage for themselves and others. Rewards can go to those managers that can beat their benchmarks, which for many, is the S&P 500 Index.
The S&P 500 Equal Weight Index is comprised of the 500 leading companies in various industries of the U.S. economy, representing about 80 percent of coverage of all U.S. equities. Company boards and executives know that inclusion in the index (or being dropped from it) can mean very good news or very bad news on the day when the index components are announced.