Greed or Green? The Reality of Investor Priorities
A recent KPMG global survey of 550 board members and executives at large corporates found the vast majority plan to up their investments in sustainability initiatives over the next three years. The driving force behind this surge, as explained by KPMG's US ESG Audit Leader in a Bloomberg interview is regulatory pressure. The new regulatory environment mandates a level of precision and rigor in sustainability reporting akin to that of financial disclosures. Evolving standards now demand more attention and investment, which seems puzzling to those in the capital markets who eschew investing on the basis of societal good.
However, KPMG emphasized that the rationale behind renewed investment in ESG transcends mere compliance. Rather, it’s viewed as a strategic investment that will bolster financial performance in both the short- and long-term contrary to the ESG Greed or Green? The Reality of Investor Priorities pushback in the US. Among investors, there is little consensus on the intrinsic value attributed to ESG practices. Investors remain divided on whether these initiatives—such as reducing carbon emissions, promoting social justice, and ensuring board diversity— directly contribute to a company's financial performance, long-term viability, or overall valuation. Some investors see ESG practices as critical for sustainable growth and risk management, while others view them as burdensome expenses that do not clearly enhance financial returns.
This gap highlights a broader issue within the corporate world: aligning goals with tangible outcomes. For investors and IROs, this underscores the importance of scrutinizing not only a company's commitment to sustainability but also its capacity to enhance financial performance and ultimately, strategic advantage.
Gauging a company’s worth traditionally revolved around tangibles (fundamentals, growth potential and so on) as well as intangibles (such as management’s quality of execution, and brand strength.) However, the surge in ESG-centric reporting seems to overshadow these critical evaluation metrics. Unless ESG efforts are woven into the core operational and strategic framework of a company and its industry, they risk undermining the traditional pillars of corporate valuation and performance.
For IROs, this is an opportunity to reevaluate what makes a company truly valuable in the eyes of investors. By championing ESG in their core messaging, they may mitigate risk but also discover (to their surprise) that core message can backfire.
While we all strive for a future that's greener, fairer, and more prosperous, the reality remains that investors prioritize financial returns. If the success of a company is measured not by its financial performance, but by its impact on society and the environment, capitalism will collapse. Yet, if ESG practices result in cost-effective operational improvements and generate a return on investment, the question shifts to: how can I invest?
