Of course, there are social impacts like human rights violations, labor relations, and supply chain risks that can negatively impact a company’s license to operate and financial stability, and those are important. In other words, a company’s actions, policies, and investments can and should positively impact people’s lives. The very nature of social impact isn’t just about risk it’s also about prosocial behavior. As State Street Global Advisors noted, “ESG information tends to be the most effective at identifying poor ESG firms that are more likely to underperform as opposed to predicting future outperformers.” Indeed, simply de-risking ESG exposure is unlikely to help investors make affirmative bets on which companies will outperform the market. And equity investors seek to maximize their returns, not just mitigate their risks. The problem is, most of the interest in ESG is not from lenders evaluating credit risk it’s from investors evaluating equity risk. Risk analysis focuses on the likelihood of repayment. That makes sense because the bread and butter of those agencies is rating corporate and municipal debt, and the primary concern of any investor with respect to debt is, of course, repayment. information that is impactful to a company’s financial performance). Rating agencies like Moody’s and S&P view ESG almost exclusively through the lens of materiality (i.e. Decision-makers can consider these as important indicators of the company’s potential.īut there’s a deeper existential issue going on here. What future demographic or consumer changes could shrink the market for a company’s products or services? Complex social dynamics, from surges in online public opinion to physical strikes and company boycotts by different groups, affect long-term shifts in consumer preferences.What risks come with the safety implications of a product or the politics of a company’s supply chain? Corporations that ensure their products and services do not pose safety risks, and/or minimize the exposure to geopolitical conflicts in their supply chains, tend to face less volatility in their businesses.
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