News about a company’s environmental behavior affects its market value, according to a report from Deloitte.
The report, “Drivers of Long-Term Business Value: Stakeholders, Stats and Strategy,” says an organization’s understanding of how its stakeholders (including shareholders) perceive and value the organization’s environmental, social and governance (ESG) issues can lead to financial benefits.
It cites an MIT study of US publicly traded companies over a 30-year span, from 1980 to 2009, that showed stock prices dropped an average of 0.65 percent within a two-day window following the release of negative environmental news. Investors reacted more strongly to negative environmental news with each passing decade, the study found.
On the other hand, positive news on a company’s environmental behavior produced an average increase of 0.84 percent in stock price, the report says. However, over time, the positive investor response to good environmental news has been tapering off. Deloitte says this suggests that shareholders are increasingly biased against companies with poor environmental performance, and less impressed — or more demanding of — stronger performers.
Growing shareholder interest is also evident in the number of shareholder resolutions filed targeting an ESG issue (see chart), according to the report.
Deloitte says a recent survey it conducted of 208 global CFOs from 10 countries found that more than 70 percent are fully or periodically involved in all aspects of sustainability strategy and governance at their firm. More than 75 percent of CFOs surveyed said communicating sustainability issues to shareholders and institutional investors is important.
Additionally, the report says a survey of UN Global Compact member CEOs found that 93 percent view sustainability as a critical driver of their company’s future success, and up to 81 percent said sustainability is an important factor in strategy and operations. By 2020, these CEOs say they expect sustainability to be fully integrated into corporate capabilities, processes and systems, and across global supply chains and subsidiaries.
However, how we make decisions in real life is not always rationally optimal, the report says. These biases can, according to research at INSEAD, help businesses understand how stakeholders perceive a company’s ESG performance.
People tend to judge value not in terms of absolute states or outcomes, but in terms of gains and losses relative to a reference point. Stakeholders are more likely to view a company’s ESG performance relative to their own reference point, the research says. Additionally, stakeholders tend to be more concerned when a company’s ESG performance falls relative to a preferred level. And a company that improves its ESG performance form a very low level — for example, increases energy efficiency — will be rewarded more than another one already performing at a higher level of energy efficiency.