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The Environmental, social and governance premium: New perspectives on value and performance

In a new McKinsey survey, executives and investment professionals largely agree that environmental, social, and governance programs create short- and long-term value

In a new survey, executives and investment professionals largely agree that environmental, social, and governance programs create short- and long-term value—though perceptions of how have changed over the past decade.

Pressure on companies to pay attention to environmental, social, and governance (ESG) issues continues to mount. Researchers, business groups, and nongovernmental organizations have variously warned of the risks—or emphasized the opportunities—that such issues present to company performance.

Findings

1 Most executives and the investment professionals who scrutinize their companies seem to agree that ESG programs affect performance. In our latest McKinsey Global Survey on valuing ESG programs,

2 83 percent of C-suite leaders and investment professionals say they expect that ESG programs will contribute more shareholder value in five years than today. They also indicate that they would be willing to pay about a 10 percent median premium to acquire a company with a positive record for ESG issues over one with a negative record. That’s true even of executives who say ESG programs have no effect on shareholder value.
Among respondents who say that such programs increase shareholder value, perceptions of how the programs do so have shifted since our survey on the subject in 2009.

3 A majority of these business leaders and investment professionals now say that environmental, social, and governance programs individually create value over both the short term and the long term. Moreover, the perceived long-term value of environmental and social programs now rivals or exceeds the value attributed to governance programs.

4 Since 2009, the proportion of investment professionals who report a positive impact from governance programs has held steady, and now they and executives are about equally likely to say the programs have a positive short-term impact.

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What follows is a closer look at how perspectives have changed with respect to several topics, including the impact of ESG on shareholder value and financial performance, the reasons companies prioritize ESG programs, and the challenges and opportunities in ESG data and reporting.

ESG programs and shareholder value

A majority of surveyed executives and investment professionals (57 percent) agree that ESG programs create shareholder value. That share is largely consistent with responses to the survey a decade ago, as well as across most demographic categories—job title, company size, company ownership (public or private), and geography—in the present survey. Respondents in consumer-focused companies are more likely (66 percent) than those in B2B companies (56 percent) to say these programs create value.

A small minority remains unconvinced.

Just 3 percent of respondents believe such programs reduce shareholder value, and 14 percent say they are unsure. That level of uncertainty is significantly lower than the 25 percent of respondents who were uncer- tain in 2009, but the shift corresponds to an increase in the proportion of respondents who say ESG programs have no effect on shareholder value—now at 25 percent, up from 14 percent in 2009. Much of this increase is due to the higher proportion of investment professionals reporting that the programs have no effect.

These findings come as 58 percent of respondents tell us the current political environment has increased the importance of ESG programs to meet stakeholder expectations. In addition, about four in ten say the political environment has increased the importance of ESG programs to shareholder value.

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Changing perspectives

Among respondents who say that ESG programs add value, perspectives have shifted since 2009 . The survey asked separately about environmental, social, and governance programs over the long and short term. For each type of program and each time horizon, the proportion of these respondents perceiving value creation has increased, with the greatest increases seen in social programs.
Respondents are likelier to say each type of program contributes long-term value than short-term value, as was true in 2009—which may reflect the initial costs associated with investing in some ESG programs.
Respondents who say that ESG programs add value are now nearly unanimous in perceiving long term value from environmental programs. Social and governance programs approach the same levels, with 93 percent saying social programs make a positive long-term contribution, compared with 77 percent in 2009.
Similarly, the share of executives saying governance programs have positive long-term contributions has grown since the previous survey. Now executives are about as likely as investment professionals (about 90 percent of each) to say governance programs have a positive long-term contribution, which was not true in the previous survey.

Among respondents who see value from ESG programs, a majority now say these programs add shareholder value in the short term. Two-thirds of these respondents say social programs add value in the short term, up from 41 percent ten years ago. Just over seven in ten say governance programs have a positive short-term effect, compared with 67 percent who said so previously.

Read more in the paper (and download)

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