ESG Trends: Explore How ESG Impacts Business Value

The pandemic accelerates the interconnectedness between sustainability and the financial market, with responsible investing being on the trajectory to the mainstream. Experiencing the high vulnerability of the economy to global crises and social unrest, investors are proactively incorporating Environment, Social and Governance (ESG) factors into their investment analysis to gain a more holistic view of companies’ material risks, expected growth opportunities, and profit margin.

As reported by the CFA Institute, 85% of its members are now taking at least one of the E, S or G factors in investment decisions; meanwhile, 76% of institutional investors and 69% of retail investors have reflected an interest in ESG investing, demonstrating ESG considerations have become an integral part of the asset management framework.

ESG factors represent one of the fundamental components in determining the long-term prospects and financial performance of a firm. For example, high-emitting companies may suffer from a higher operating cost in combating carbon emissions in the face of the tightened environmental regulations. In general, better ESG performing companies are associated with lower risks and higher returns, which can be reflected in the company’s value. Hence, establishing a systematic approach to integrate ESG factors into fair value calculation is of paramount importance for optimizing investment strategy.