Does ESG really lead to improved corporate performance?

James Hills | 17 May 2023 | Middle East perspective

The post-pandemic flow of international capital and talent into the GCC region has seen an increased interest in emerging themes (and regulations) from European and US financial markets. A clear trend is the application of Environmental, Social and Governance (ESG) frameworks, which apply a risk lens to specific issues arising from investments.

A new study from Bain & Company and EcoVadis has revealed that ESG activities performed by companies correlate to stronger financial performance, seemingly providing compelling evidence for companies to prioritise their ESG efforts.

At its heart, ESG is a risk mitigation tool that can help companies avoid potential problems and improve their overall performance – and that of their supply chain and investments. On that basis, it is not surprising that companies that prioritise ESG initiatives tend to do well financially.

However, correlation is not causation. While ESG can play a significant role in driving financial success, there may be other factors at play as well. One possible explanation for the correlation between ESG and financial performance is that companies with a strong commitment to ESG may also have stronger risk management approaches in general. This could be one piece of a wider puzzle driving performance, and suggests that companies should take a holistic approach to managing risk and improving financial results.

Despite this, the study found that ESG can be used effectively as a tool for improving financial performance; and for longer-term sustainability. The companies with the strongest financial performance were also found to have high ESG scores, indicating that these initiatives can be an important part of an overall strategy for success.

Whilst an ESG approach is a means and not an end, it does also provide – when done well – stakeholders in the company with confidence that the company is considering wider issues than narrow, short-term profits.