Yes, they do. ESG-focused companies are more likely prepared to meet long-term investment goals.1 In general, companies are exposed to more ESG-related risks and assets that depreciate over time. Challenges that may emerge over time include changes in regulation, social expectations, disruptive technology, or environmental conditions.
Companies with sustainability practices in place can maximise operational efficiency by reducing energy resources and water usage, which in turn may lower operating costs.2 These companies are likely more prepared to upgrade operations and facilities to conform to energy-efficiency and changes related to ESG. Some examples include a fossil-fuel company may need replace projects with renewable programs or a beverage maker faces a lawsuit for water pollution if it has inadequate corporate social responsibility (CSR) policies.
In the long-run, companies that have sustainability and social responsibility as internal core values are more likely to focus on best practices and professional conduct, face less compliance burden and help mitigate legal risks. High-scoring ESG companies with sustainability plans in place may be better prepared to comply with new laws and regulations.3 Furthermore, government agendas around the world are increasingly supportive of sustainability initiatives and may even offer subsidies or tax breaks for renewable energy, environmental and inclusive practices.
An ESG strategy’s potential for outperformance in the long term, moreover, rests on its practice of modeling different scenarios of deterioration or strength. That can mean anticipating the consequences for corporate health in the context of varying climate scenarios or the degree of positive or negative effects due to changes in social conditions. While the social factors at issue in the pandemic have varied by region and timeframe, the social factors broadly prevalent to companies include health and safety, labor relations, and respect for the community.
The measure of a company’s sustainability can come down to how resilient and agile the company is in handling many stakeholders (their customers, shareholders, employees, and suppliers, etc.), global uncertainties, shocks and disruptions—regardless of whether these are caused by a pandemic, social unrest, or environmental factors.
The qualitative, non-financial factors that are applied by ESG strategies can act as potential drivers of future business strength and weakness. That may be one reason why in-depth local expertise continues to gather momentum behind ESG strategies, as investors increasingly look to see whether a company has the strategic vision and capabilities to achieve and maintain strong ESG performance—in other words, long-term resiliency and the ability to manage tail risks.
1 Manulife Investment Management, “5 benefits of ESG investing”, 17 May 2022.
2 Manulife Investment Management, “Sustainable investing: unpacking the corporate governance factor in ESG”, 14 April 2022.
3 Manulife Investment Management, “ESG portfolio resilience to social dislocations”, 22 September 2020.