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Environmental Issues Affect Market Value, Deloitte Says

An organization’s environmental, social and governance (ESG) performance can directly and indirectly impact its market valuation, according to a Deloitte report.

Finding The Value In Environmental, Social And Governance Performance says that short-term ESG issues and events, including human-rights issues, product recalls, boycotts and protests, often trigger the strongest and most immediate impact on stock prices. As the news media continues to discuss an organization’s ESG crisis, this can further erode shareholder confidence.

As an example, the report cites the April 5, 2010 explosion that killed 29 miners at Massey Energy’s Upper Big Branch mine. At that time, Massey Energy was the fourth-largest US coal producer. Its stock fell 11 percent on April 6, and was down 33 percent by the end of the month.

While investor decisions can be influenced by a company’s ESG disclosure around the time of a crisis, there is less convincing evidence that ESG performance leads to higher stock returns over the long-term, Deloitte says. This may be a result of only small incremental ESG program shifts or reporting that does not resonate directly with investors, who may not consider the information in their buy/sell decisions.

For companies to protect themselves against ESG crises when they arise and be rewarded by investors for their ongoing ESG management efforts, they need to consider whether to disclose information that explicitly ties these efforts to reductions in exposure to ESG risks.

Deloitte’s report says risks may play an increasingly important role in performance, for the following reasons:

  • The average investor is paying more attention to ESG information, especially related to downside risks.
  • Volatility in the global business environment due to financial risks, regulatory uncertainty, extreme weather and social unrest are all more critical and persistent than previously thought.
  • Today’s lean supply chains are often brittle and vulnerable to disruption because supply chain managers may be too focused on efficiency.
  • The rise of social media rivals the impact of politics and regulatory processes (see chart).

The report says while the traditional news media is usually the first to report on a story, social media and blogs quickly pick it up — and further discuss the company’s shortcomings. Social media can erode a company’s reputation and investor confidence in management, it says.

Analysis by the Governance & Accountability Institute published in December 2012 found that the number of S&P 500 and Fortune 500 companies managing and reporting performance on ESG issues more than doubled from 2010 to 2011. 

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