As more investors demand environmental, social, and governance (ESG) commitments and disclosures from companies, it stands to reason that boards of directors and high-ranking executives are pondering the value-add proposition offered by ESG.
At publicly traded companies, including those residing in exchange traded funds such as the Invesco ESG Nasdaq 100 ETF (QQMG) and the Invesco ESG NASDAQ Next Gen 100 ETF (QQJG), ESG conversations can be sensitive. Said another way, boards and executives need to prove to shareholders that ESG efforts, some of which are costly, bear fruit.
There’s good news for ESG-aware corporations and investors alike. A recent study from consulting giant Bain & Company suggested that there are positive financial outcomes tied to corporate-level ESG priorities.
“Not every analysis yielded a positive correlation, but the research did reveal that, in addition to benefiting the planet and society, ESG activities have no strong negative correlations with financial outcomes; in fact, they are associated with encouraging revenue growth and EBITDA margins. Our findings indicate that positive ESG outcomes are a trait of successful companies and that sustainability measures correlate with better financial performance,” according to Bain.
Obviously, QQJG and QQMG explicitly mention ESG in their titles, but shrewd investors realize that more than ESG makes the stocks in these ETFs tick. For example, financial markets ascribe more significance to Apple (NASDAQ: AAPL) — a major QQMG holding — selling iPhones than the company’s ESG plans.
Still, a company’s various ESG efforts are important pieces of the broader corporate puzzle, and when those pieces come together, ESG plans can reward employees and other stakeholders.
“They improve carbon emissions, use renewable energy, and have more diverse leadership and talent. Working together like the gears of a pocket watch, these activities correlate with improvement in financial and operational results, including higher profitability and revenue growth, customer satisfaction, and employee satisfaction,” added Bain.
Another point to consider is the evolution of ESG, meaning that more companies are focusing on social and governance issues after having devoted significant resource to environmental initiatives. On the “S” front, some QQJG and QQMG member firms are prioritizing gender diversity on boards and in upper management — a pursuit that can materially benefit investors over time.
“Companies that rank in the top 25% of their industry for executive team gender diversity have annual revenue growth approximately 2 percentage points above that of companies in the bottom quartile,” concluded Bain. “And their EBITDA profit margins are also 3 percentage points higher than that same group. Other studies have attributed this to the fact that having a diverse leadership team provides a broader view of opportunities and risks.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.