Environmental outperformance attracts capital
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Harvard Business School's Cheng Beiting was among authors of the paper on the relationship between corporate social responsibility (CSR) and a company's access to finance, which won the SEB Award at the UN Principles for Responsible Investment-Mistra Conference. The paper found that firms with better environmental and social performance can face significantly lower capital constraints.
Findings show that drivers include improved stakeholder engagement, which reduces the likelihood of opportunistic behaviour and leads to more efficient and co-operative interactions with a long-term approach. In addition, companies with better CSR are more likely to disclose information not traditionally included in financial reporting. More transparency reduces information asymmetries between firms and investors, reducing perceptions of risk, which in turn can reduce agency costs. This can enhance a company's ability to obtain capital through lower interest rates and/or a larger amount of funds.
"Market participants are more willing to allocate scarce capital resources to firms with better CSR performance," says the paper. Firms better able to access finance in capital markets can be in a stronger position to make major strategic investment decisions, with knock-on effects on stock returns and sustainable competitive advantage in the long run.
During the conference in October, PRI Director of Strategic Development Rob Lake highlighted the need to bridge the divide between academic research and investing. To help achieve this, he called for research to explore issues including fundamental environmental, social and governance (ESG) drivers of return and risk across asset classes.
Trucost Director Lauren Smart, who was at the event, said: "The potential for environmental performance to help overcome capital constraints is particularly relevant to both equity and debt investors in the current financial climate. Understanding which environmental key performance indicators are most relevant to risks and returns, and how companies compare on these, is becoming increasingly important to companies and investors as markets recognise the potential materiality of resource scarcity and pollution impacts."
Other evidence showing a link betweek environmental and financial performance includes analysis of the 100 companies that topped the Newsweek Green Rankings of the 500 largest U.S. companies in 2009. Findings show that they outperformed the S&P 500 financially over the past two years. Trucost assessed environmental impacts to help give each company an overall "Green Score" in Newsweek's Rankings. Data on corporate environmental performance is also used to identify related risks and opportunities in portfolios invested in equities, infrastructure, property and corporate bonds. If you would like to find out more or are interested in exploring ways to assess environmental risk in sovereign bond ratings, please contact Lauren Smart at email@example.com
Cheng, B et al, Corporate Social Responsibility and Access to Finance
Rob Lake, Responsible investment research - where we are, and where to do we need to go?