There is a mutual cause-and-effect relationship between a firm’s ESG investments and its profitability, says a report by ISS ESG.

ISS ESG is the responsible investing arm of Institutional Shareholder Services (ISS). According to Pensions&Investments, the ISS study found that those firms which invest in improving their ESG corporate ratings are also more profitable.

Further, these companies are also susceptible to lower volatility in their performance, hence less risk-prone for shareholders observed ISS.

On the flip side, ESG-lax companies will face negative consequences.

ISS: Fallouts from neglecting ESG

In present times, investors demand to invest in ESG-friendly companies. This growing trend has an implication for those companies that neglect their ESG responsibilities. Investors will shun them, and as a result they would be unable to raise capital, or do only at a higher cost.

Additionally, such lax behavior may attract a regulatory backlash and financial penalties. Further, customers may stop buying the company’s products, causing a decline in revenues and profitability.

Inattention to employees’ welfare, and to issues such as gender discrimination, diversity, and equal pay, will drive down productivity and push up employee turnover.

ESG and profitability – the virtuous circle

The relationship between ESG and financial performance is perhaps due to the fact that more profitable firms have better resources to invest in areas that positively influence ESG.

However, it could also be that profitability rises as a result of a company better managing its material ESG risks, or it could be a little bit of both, the ISS study observed.

If it is a little bit of both, then this means that good-ESG initiatives drive up financial performance. This provides the monetary resources to invest to be an even better ESG firm. This again drives up performance, and so the virtuous circle goes on.

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