In a new survey, executives and investment professionals largely agree that environmental, social, and governance programs create short- and long-term value—though perceptions of how have changed over the past decade.
The pressure on companies to address environmental, social, and governance (ESG) issues is intensifying, with researchers, business groups, and NGOs highlighting the risks and opportunities they present. According to our recent McKinsey Global Survey, 83% of C-suite leaders and investment professionals anticipate that ESG programs will contribute more to shareholder value in five years than they do presently. Additionally, they express willingness to pay a median premium of about 10% to acquire a company with a positive ESG record over one with a negative record, even among those who believe ESG programs have no immediate impact on shareholder value.
Perceptions regarding how ESG programs contribute to shareholder value have evolved since our previous survey in 2009. A majority of respondents now believe that environmental, social, and governance programs individually create value in both the short and long terms. Furthermore, the perceived long-term value of environmental and social programs now rivals or exceeds that attributed to governance programs.
This shift in perspective prompts a closer examination of various topics, including the impact of ESG on shareholder value and financial performance, the motivations behind companies prioritizing ESG programs, and the challenges and opportunities associated with ESG data and reporting.
ESG programs and shareholder value
A majority of surveyed executives and investment professionals (57%) agree that ESG programs create shareholder value, a figure consistent with responses from a decade ago and across various demographic categories. Respondents in consumer-focused companies are more inclined (66%) to believe in the value creation of these programs compared to those in B2B companies (56%).
Only a small minority (3%) believe that ESG programs reduce shareholder value, with 14% expressing uncertainty, a significantly lower level of uncertainty compared to 2009. However, the proportion of respondents indicating that ESG programs have no effect on shareholder value has increased to 25%, up from 14% in 2009, largely due to a higher proportion of investment professionals holding this view.
These insights come amidst 58% of respondents acknowledging that the current political environment has heightened the importance of ESG programs in meeting stakeholder expectations, while around 40% state that the political environment has increased the significance of ESG programs in relation to shareholder value.
Among respondents who say that ESG programs add value, perspectives have shifted since 2009 (Exhibit 1). The survey asked separately about environmental, social, and governance programs over the long and short term. For each type of program and each time horizon, the proportion of these respondents perceiving value creation has increased, with the greatest increases seen in social programs. Respondents are likelier to say each type of program contributes long-term value than short-term value, as was true in 2009—which may reflect the initial costs associated with investing in some ESG programs.
Respondents who say that ESG programs add value are now nearly unanimous in perceiving long-term value from environmental programs. Social and governance programs approach the same levels, with 93 percent saying social programs make a positive long-term contribution, compared with 77 percent in 2009. Similarly, the share of executives saying governance programs have positive long-term contributions has grown since the previous survey. Now executives are about as likely as investment professionals (about 90 percent of each) to say governance programs have a positive long-term contribution, which was not true in the previous survey. (Explore the results from C-level executives in “An interactive look at how executives value ESG programs.”)
For respondents acknowledging the value of ESG programs, a majority now believe that these programs contribute positively to shareholder value in the short term. Two-thirds of these respondents attribute positive short-term value to social programs, up from 41% a decade ago. Similarly, just over seven in ten perceive a positive short-term effect from governance programs, compared to 67% previously. Since 2009, the proportion of investment professionals reporting a positive impact from governance programs has remained steady, and now they are equally likely as executives to view these programs as having a positive short-term impact.
Regardless of their current beliefs about ESG program value, respondents’ expectations for future value are reflected in their willingness to pay a premium for companies with positive ESG track records in hypothetical M&A scenarios. Across the board, respondents indicate they would pay approximately a 10% premium for a company with a positive ESG record over one with a negative record. While this median value remains consistent across various demographic categories, there is considerable variation in responses. Some respondents anticipate even higher premiums, with a quarter willing to pay a premium of 20 to 50%, and 7% willing to pay over 50%. Even those who do not believe ESG programs increase shareholder value are willing to pay a 10% premium for a company with a positive ESG record, while those who do believe in the value of ESG programs are willing to pay a median premium of 15%.
ESG’s contributions to financial performance
The primary ways in which ESG programs enhance financial performance, such as maintaining a favorable corporate reputation and attracting and retaining talent, remain consistent with previous surveys. However, there have been shifts in perceptions regarding other aspects of ESG’s impact. Respondents who believe ESG programs contribute to shareholder value are now more inclined to highlight their role in strengthening competitive positioning and meeting societal expectations for corporate behavior, compared to a decade ago.
Moreover, a majority of respondents view high-performing ESG programs as indicative of effective management, aligning with findings from 2009. When asked about the most important aspects of ESG-related activities, compliance emerges as a top priority, with increased emphasis compared to the past. Conversely, there is reduced emphasis on altering business processes to integrate ESG practices, a trend observed across both investment professionals and executives.
Considering ESG factors in strategic and operational decisions
Executives and investment professionals commonly integrate ESG considerations into their strategic and operational decision-making processes. Over 70% of respondents indicate that they, or their organizations, consider ESG factors to some extent when assessing competitors, supply chains, and potential capital projects. Additionally, a significant majority consider the impact of ESG programs on various stakeholder groups.
When tracking the effects of ESG programs, respondents prioritize assessing their impact on board directors, regulators, and investors, with approximately half reporting considerable consideration for these stakeholders. Roughly one-third of respondents also track the impact on industry peers, associations, prospective employees, and non-governmental organizations (NGOs). Investment professionals demonstrate a wider scope of consideration, with over half indicating that they assess the impact on board directors, communities, investors, prospective customers, and regulators.
A quest for meaningful ESG data and reporting
The percentage of respondents acknowledging the usefulness of ESG reporting standards and frameworks has increased by 15 points since 2009. However, both investment professionals and executives who do not fully integrate ESG considerations into their assessments of competitors, suppliers, or major capital markets attribute this gap primarily to insufficient data availability and usability issues, such as indirect contributions or a lack of analytical expertise.
Respondents highlight the importance of quantifying the financial impact of ESG programs, measuring business opportunities and risks, and having a consistent set of industry-specific metrics as crucial features of ESG reporting systems. Investment professionals value reporting frameworks and certification standards like SA8000, while indexes from polling, media, and PR firms are considered less valuable.
Regarding tools to improve communication between organizations and investors or analysts, integrated corporate reports incorporating financial and ESG data are favored by a majority of investment professionals. However, executives are less inclined towards this preference, with only one-third indicating a similar preference.
Looking ahead
Executives and investment professionals increasingly acknowledge the impact of ESG issues on company performance, anticipating a growing financial influence as stakeholder expectations rise. Industries facing complex ESG records may find value in addressing these areas to manage stakeholder pressure and gain competitive advantages.
With heightened interest in ESG performance, there’s a call for improved transparency through standardized, integrated, and easily comparable ESG metrics and data. While comprehensive reporting may not be feasible, focusing on critical information valued by stakeholders is essential. Investment professionals particularly seek standardized ESG data closely linked with financial metrics, aiding internal ESG leaders to drive change, such as through scenario planning mandated by TCFD standards.
Past research highlights the benefits of strong ESG performance, including revenue growth, cost reduction, regulatory compliance, enhanced employee productivity, and targeted investments. The willingness of respondents to pay premiums for strong ESG performance and the perception of its link to overall management quality suggest a broader integration of ESG into financial and strategic decision-making. As ESG’s importance grows, companies not fully embracing it risk missing out on its value.
Tran Dung/ATES GLOBAL
Souce: Mckinsey
