JANUARY 9, 2020
There appears to be a link between ESG – Environment, Social, and Governance – and financial performance. While one can argue that the relationship between ESG and financial performance is perhaps due to the fact that more profitable firms have the resources to invest in areas that positively influence ESG, it could also be that profitability rises as a result of a company better managing its material ESG risks, or it could be a little bit of both. If it is a little bit of both, then this means that good-ESG initiatives drive up financial performance, which then provides the monetary resources to invest to be an even better-ESG firm, which then drives up performance again, and so on. People may choose not to invest in a firm that has poor ESG, thereby limiting its access to capital and raising its cost of capital. Firms that get in trouble on the environment may be distracted by the regulatory headache (higher costs) and customers may avoid the firm (lowering revenue). If one does not treat employees right, this could lower morale, increase turnover, and therefore lower productivity.