With major companies such as McDonald’s Corporation and Walmart Stores naming sustainability as one of their top priorities in recent years, many companies are facing pressure to ensure they incorporate sustainability into their goods and service delivery. However, one of the main criticisms against corporate sustainability in the past few years has been that it contradicts the fiduciary duty of managers by not putting company shareholders first.
Corporate sustainability refers to a business approach that involves pursuing social and economic strategies to create sustainable value for shareholders, company employees, consumers and societal value.
A 2016 paper titled “Corporate Sustainability: First Evidence on Materiality” challenged this notion by outlining financially material environmental, social and governance (“ESG”) factors that could help improve portfolio returns. The paper noted that sustainability practices are in line with activities that create shareholder value.
ESG investing has exploded in the years since its publishing as more investors now consider the environmental, social, and governance factors before investing.
High-ability managers will be critical to choosing effective ESG projects and ensuring the success of sustainability initiatives. Analysis of stock returns from 2012 to 2020 found that high-quality managers typically assign resources to ESG initiatives in a way that increases shareholder value. The portfolios of companies with ESG investments and high-ability leaders outperformed portfolios from companies with low-ability CEOs and low ESG investments by 6.64% annually.
Additionally, portfolios from companies with high ESG investments and high-ability CEOs outperformed companies with high ESG investments but low-ability managers as well as companies with high managerial ability and low ESG investments. It seems that the combination of high ESG investment and high-quality leadership is critical to maximizing value for shareholders.
Supply chain ESG activities can also have long-term ramifications on a company’s stock returns. A research paper analyzing data from U.S.-listed companies and their suppliers between 2009 and 2020 discovered a link between ESG risk in the supply chain and a company’s future stock returns. Researchers found that companies with the least supplier-related ESG incidents had an excess 6.7% annual return compared to companies with the most supplier ESG incidents.
Limiting supply chain ESG risk generally contributed to greater returns in three ways: It contributed to supply chain stability, which allowed companies to optimize their inventory and fulfill customer orders efficiently. Maintaining relationships with socially responsible suppliers helps companies maintain their brands and attract socially conscious investors and customers. Finally, engaging in ethical and responsible practices can help companies limit their legal liabilities and hedge regulatory risk.
For companies that aren’t fully sold on the bottom-line benefits of implementing ESG best practices, a number of examples such as Prospera Energy Inc. (TSX.V: PEI) (OTC: GXRFF) (FRA: OF6B) are showing that it can be done.
NOTE TO INVESTORS: The latest news and updates relating to Prospera Energy Inc. (TSX.V: PEI) (OTC: GXRFF) (FRA: OF6B) are available in the company’s newsroom at https://ibn.fm/GXRFF
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