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Finance & Investment
ESG Affects Investor Decisions Differently in Short and Long Term, Deloitte Says

Investor decisions can be influenced by a company’s environmental, social and governance (ESG) disclosure in the short-term but may not lead to higher stock returns over the long-term, Deloitte said in a recent report.

Investor decisions can be influenced by a company’s environmental, social and governance (ESG) disclosure in the short-term but may not lead to higher stock returns over the long-term, Deloitte said in a recent report.

The study found short-term ESG issues and events, including human rights issues, product recalls, boycotts and protests often trigger the strongest and most immediate impact on stock prices. If the news media picks up an organization’s ESG crisis, the event can have an increased negative effect on shareholder confidence.

While positive ESG disclosures can increase stock value in the short run, there is little evidence it does so in the long run. This may be a result of only small incremental ESG program shifts or reporting that does not resonate directly with investors, who may not consider the information in their decisions, Deloitte says.

“ESG issues are particularly vexing because they can arise anywhere in a company’s value chain,” said Eric Hespenheide, a partner at Deloitte & Touche LLP. “Many ESG risks — from labor protests and safety concerns to ecosystem damage — are embedded in vast corporate supply chains, where they are getting more attention.”

“For many companies, these are often reputation risks — guilt by association — rather than direct operations or financial risks, and these risks cannot simply be outsourced,” he added.

Deloitte’s report highlights how and why ESG performance is expected to continue to be a consideration in financial valuation and several reasons risks may play an increasingly important role on performance. This includes how more investors are paying attention to downside risks and the importance of considering volatility in the global business environment due to financial risks, regulatory uncertainty, extreme weather and social unrest.

The report says today’s lean supply chains are often brittle and vulnerable to disruption because supply chain managers may be too focused on efficiency. The rise of social media is also beginning to rival the impact of public politics and regulatory processes.

“A closer look at ESG by the numbers suggests that it is a lens through which business leaders can build better, more resilient, and more valuable enterprises,” said Dinah A. Koehler, a senior research manager at Deloitte Services LP and coauthor of the report.

Companies are beginning to go beyond ESG to assess material costs and benefits of their sustainability investments, according to the latest installment of The Changing ESG Landscape, a quarterly analyst program hosted by MetaVu and CRD Analytics.

@Bart_King is a freelance writer and communications consultant. @mikehower contributed.

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