Let’s break it down. As a recent Forbes article explains, “Firms that pursue better ESG practices have higher quality management and better stock performance…the reason is that ESG criteria are key indicators of management quality, which helps avoid stock specific risk in a market with imperfect and asymmetric information.”
By embracing ESG, firms demonstrate they proactively take advantage of long-term opportunities and have their employees’ and longevity’s best interests at heart. These companies tend to have lower costs of capital and higher operational and stock price performance.
Some skeptics point to short-term discrepancies between SRI indices and their non-SRI counterparts. However, this “can be explained by the fact that some SRI indices have different sector allocation compared to the parent index, especially those that explicitly exclude entire industries or sectors.”
What’s the bottom line? “Over long periods of time…ESG criteria lead to higher returns because ESG practices are good for business.”
Check out the full article on Forbes here.