The term ESG is an abbreviation standing for Environmental, Social, and Governance (Gillan et al. 1). The term refers to how investors and corporations integrate social, environmental, and governance concerns in their business models or activities. In corporate finance, ESG is a significant concept due to its recognition that corporations or organizations have a responsibility to society and the environment apart from maximizing shareholders’ value. ESG significance in corporate finance has continued to gain significance recently, with investors increasingly getting interested in investing in organizations or corporations having strong ESG profiles due to their belief that such corporations have a better standing to generate long-term value and manage risks. For instance, in 2019, about 300 mutual funds having strong ESG profiles received a total of about $20 billion in net flows (Gillan et al. 1). Besides, from a corporate perspective, corporations having strong ESG profiles have better risk management profiles that are attractive to employees and make their retention easy. A promise for attracting and retaining better employees results in strong relationships with stakeholders due to the reduced risk of employee turnover. Also, organizations that are proactive in managing matters related to ESG are more likely to be held positively by customers, the public, and regulators. This is vital because a positive view by the customers, the public, and regulators helps in enhancing the company’s brand value and reputation. A high company brand value and reputations increase the company’s goodwill value which positively impacts the company’s sales.
Maximizing stakeholders’ value is the financial managers’ standard goal. It means that their aim is increasing the company’s stock and provide the stakeholders with the highest possible return. For instance, Despite the past having characterized financial managers as focusing on shareholder value maximization, the emergence of ESG issues has led to a debate on whether their regard for ESG contradicts their primary focus. However, as stated by BlackRock chairman Larry Fink in his letter to other CEOs, ESG consideration is in line with achieving long-term profits for any organization because the success of any corporation lies in its consideration of all of its stakeholders (Cornell, Bradford, and Alan 2).
ESG can be held to contribute to the maximization of shareholders’ value because it positively impacts the shareholders’ brand image and reputation. A positive brand image and reputation inspire customer loyalty to the company, thereby increasing its sales. Also, a positive brand image and reputation lead to the attraction and retention of the best employees. Besides, addressing ESG issues makes a company cut down on its regulatory and legal costs that negatively impact the value of shareholders. However, it is critical to appreciate that ESG initiatives have different impacts since some, such as the reduction of carbon emissions, have a more direct impact on the corporations’ bottom line than such as the promotion of inclusion and diversity. Hence, there is a need for financial managers to engage in most of the ESG initiatives and carefully exert more effort on such efforts as the reduction of carbon emissions.
Companies that have incorporated ESG initiatives
Apple Inc. is one of the companies that has incorporated ESG initiatives in its operations. For instance, recently, a majority of Apple Inc. shareholders supported a resolution geared towards ensuring that the company streamlines its operations to ensure diversity and inclusion where it hired a third party to perform a “Civil rights audit” that covers auditing leadership diversity and pay equity among other considerations (McGee 5). The company also seeks to streamline its governance issues which is also a component of ESG. For instance, the company’s shareholders have authorized its board to perform a study of the alleged concealment clauses used in employment contracts that hinders oversight and reporting of discrimination and harassment allegations (McGee 5). The company is also involved in social responsibility activities and environmental preservation initiatives.
ESG support comes from various sectors, including the legal sector. The legal support for ESG activities from international treaties, shareholder demands, and government regulations. A majority of countries have implemented regulations and laws in support of ESG, which include labor rights regulations, corporate governance standards, and environmental protection. Complying with these regulations calls on corporations to include ESG in their activities. Besides, international treaties such as United Nations Guiding Principles and Paris Agreement on Climate Change offer a legal basis for the promotion of corporate responsibility and sustainable practice across the globe. Also, the activism by shareholders, especially the institutional investors, leads to the filling of resolutions by shareholders that create space for ESG laws within corporations.
When ESG activities enjoy wide support, there are oppositions to its practice from quarters that consider it a burden to corporations. For instance, some people against ESG hold that more regulations aimed at championing the practice of ESG can result in additional costs to the business. Some opponents to the ESG also hold that there are measurement-related difficulties to it because there is no standardized measure of ESG factors, making it challenging for a company to accurately measure its performance.
Cornell, Bradford, and Alan C. Shapiro. “Corporate stakeholders, corporate valuation and ESG.” European Financial Management 27.2 (2021): 196-207.
Gillan, Stuart L., Andrew Koch, and Laura T. Starks. “Firms and social responsibility: A review of ESG and CSR research in corporate finance.” Journal of Corporate Finance 66 (2021): 101889.
McGee S. “Shareholders Push an Array of ESG Proposals” Available at: https://www.wsj.com/articles/shareholders-push-array-of-esg-proposals-11651004156 (Accessed on 2 July 2023).
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