Several factors influence when making investment decisions: sustainability is one of them. In recent years, companies have been becoming aware of the importance of managing ESG (Environmental, Social and Governance) stocks, which have an impact on the creation of company value in the medium or long term.
Little by little, companies that handle this type of information maintain a tendency to show less risk and even to be more profitable: a very attractive factor to attract bigger and better investors.
According to a study carried out at Harvard, the companies that took charge of the ESG stocks had an increase of 46.4% in the price of their shares versus the companies that did not manage it. This figure reaffirms that having efficient and quality ESG practices motivate investors to bet on your company. Likewise, this same study asserts that the better a company does in the ESG ranking, the less likely its share price is to devalue.
Having ESG practices positively influences the generation of trust and reputation with investors and other stakeholders, since maintaining transparent financial health before them will help us generate an image of stability and awareness in the market. Other positive and very important effects are the possibility of preventing bankruptcy or anticipating market reactions to benefit the company’s shares.
How much does this indifference affect us? The answer is a lot. Although entrepreneurs are increasingly aware of the value of ESG factors, the study indicates that there is still a long way to go in the Peruvian market.
The priority of a sustainability strategy focused on ESG factors focuses on the identification and mitigation of risks (63%), the improvement of corporate culture (59%) and compliance with regulations (49%), according to published figures by EY.
A Bank of America Merrill Lynch publication, argues that 70% of North American assets cannot be analyzed without considering the ESG factor; in turn, this could prevent bankruptcy in up to 90% of bankruptcies of various companies, noting that 15 of the 17 largest bankruptcies that have occurred in the United States since 2008 could have been avoided if investors had opted for actions derived from ESG indicators.
The correct road
There are key factors for organizations to anticipate and correctly manage ESG metrics. First, a structured materiality analysis process should be established that includes stakeholder participation. At the local level, according to the BVL – EY’s “La Voz del Mercado Survey”, 66% of the specialists consulted consider that sustainability directly impacts the investment decision, however, it should be noted that only 25 % of them consider that business management, in terms of sustainability, is “good or very good”.
Regarding the management of the sustainability strategy, including ESG aspects, Ecuador has a rating of “good to very good” (33%), followed by Chile (29%) and Peru (25%). However, the picture is different when evaluating the quality and management of ESG factors: 73% of those surveyed in Peru rate it as “fair to poor”; the same occurs in Chile (70%) and Ecuador (66%).
Measurement and results in environmental, social and governance matters are important, as well as reporting more comprehensively the comprehensive risk management in matters of sustainability and climate change. More than good intentions, preparing a sustainability report should focus on the objective of achieving growth and relevance for the company, according to the sector and market where the organization develops.
For example, regarding environmental performance, priority should be given to why it is important to have metrics that help me know the impact that my company, products and/or services have on the environment and what role I play within the market where I develop. Investors believe that ESG factors can offer protection against the risks of loss: 89% of respondents mentioned that ESG information is slightly more valuable (80%) or much more valuable (9%) for decision making an investment in the face of the market slowdown.
The EY studies presented in this article are a clear sign that, based on these results, the need for Peruvian companies to prioritize efficient improvements in the management of their sustainability strategy is manifested, mainly in ESG aspects.
Companies are becoming aware of the importance of managing ESG factors, as it positively influences the generation of trust towards their investors and stakeholders.
For additional information on ESG stocks, there are many other resources available on the web