How ESG Influences Long-Term Value

ESG Due Diligence 🌎 Sustainability is increasingly influencing how capital is deployed across transactions. As ESG risks become more salient and financially material, due diligence processes are evolving to account for regulatory exposure, stakeholder pressure, and operational vulnerabilities that may affect future value creation. ESG due diligence enables investors to assess a broader set of variables beyond traditional financials. It provides insight into legacy environmental liabilities, compliance with labor and governance standards, and exposure to supply chain disruptions or climate risk. These factors are now affecting pricing, deal terms, and post-acquisition strategy. Transaction dynamics are shifting. A significant percentage of deals are now influenced by ESG findings, with investors reducing valuations or walking away from transactions where material issues are identified. This is reshaping how risk is priced and how targets are evaluated for strategic fit. In parallel, the appetite for ESG-aligned investments is expanding. Firms that demonstrate strong ESG performance are associated with enhanced regulatory preparedness, lower reputational risk, and improved access to capital. This is reflected in investor willingness to pay valuation premiums for alignment with ESG priorities. The integration of ESG remains uneven. Many investment teams report challenges defining ESG due diligence scope, identifying material topics, and accessing reliable, decision-grade data. Gaps in internal expertise and inconsistent terminology across stakeholders hinder the consistency of execution and interpretation of findings. Advanced ESG due diligence frameworks link pre-signing evaluations with strategic priorities and post-close action plans. This allows investors to translate ESG insights into governance adjustments, operational interventions, and ongoing monitoring practices that strengthen the resilience of the acquired business. New disclosure standards and taxonomies are raising expectations across jurisdictions. ESG due diligence is becoming a mechanism to anticipate and prepare for mandatory reporting, quantify transition risks, and ensure alignment with cross-border regulations such as the EU CSRD or SEC climate rules. The evolving regulatory environment and growing pressure for accountability require ESG due diligence to be treated as a technical function embedded in transaction planning. Its role is to surface material risks, inform pricing and structuring decisions, and support long-term value preservation in increasingly complex deal landscapes. Source: KPMG #sustainability #sustainable #esg #business

The ESG mindset is by nature risk-based, but it also seeks purpose. It is holistic, commercial, and aware of how impacts are connected. The ESG mindset is pragmatic in action planning but abstract in sense-making. Utilising this capability, it can help solve the world's biggest challenges by internalising new understandings of risks into business operations, making businesses much more resilient, valuable, and purposeful. Lately, I have been discussing the approach to sustainability together with Søren Bronnée Sørensen. We came up with this model to encounter risk and to inform risk by sustainability information and information related to matters that the company impact or is dependent on (e.g., natural resources). The main frameworks such as CSRD and SFDR both use risk as their common nominator to explore sustainability issues. The same risks – and the actions to mitigate them - can be used as strategic leavers to improve the resilience and the profitability of the company. As the ESG mindset is risk-based, and seeking a broader purpose, and at the same time applying a holistic and commercial approach to business strategy. It recognises that environmental, social, and governance factors are not just risks to be managed—they are interconnected drivers of long-term value creation and impact. This mindset helps companies not only mitigate risks but also unlock opportunities for resilience and profitability by integrating sustainability into their core strategy. But these risks—whether environmental (climate change, resource scarcity) or social (labor practices, diversity)—also offer strategic levers for businesses. Actions to mitigate ESG risks, such as improving energy efficiency, adopting responsible sourcing practices, or enhancing governance, not only reduce vulnerabilities but also improve operational efficiency, drive top-line, and build brand trust. This dual benefit turns risk mitigation into a source of competitive advantage, improving both the resilience and profitability of the company! From a financial perspective, ESG plays a critical role because it allows companies to proactively manage risks that could have severe financial consequences. For example, regulatory risks from non-compliance with environmental standards or social expectations can lead to penalties, legal costs, or reputational damage. Looking at it from an impact perspective, ESG is about more than compliance or financial risk management. It is purpose-driven, aiming to generate positive environmental and social outcomes. A business that integrates ESG into its strategy is aware of how its actions ripple through the value chain, influencing its employees, communities, customers, and the environment. This holistic awareness ensures that companies can align their business goals with societal expectations, positioning themselves as leaders in sustainability and earning the trust of increasingly conscious consumers and investors.

📈 Can ESG strategies truly drive long-term market value? A new global study (Chau et al., 2025) finds that ESG performance and firm value follow a nonlinear S-curve: • 🟢 Early ESG actions raise firm value through low-cost gains. • ⚠️ Mid-level efforts risk diminishing returns as costs grow. • 🌿 High ESG maturity eventually restores value, building trust and competitive advantage. But here’s the twist: this effect isn’t universal. 📍 In countries with weaker governance or environmental oversight, ESG performance sends a stronger market signal, boosting firm value more. In contrast, in advanced markets, ESG gains may already be “priced in,” leading to muted effects. So what’s the takeaway? Sustainability must be strategic. Firms and investors must calibrate their ESG actions based on local context, institutional quality, and maturity level. 📚 Why future research matters: Understanding how ESG’s financial impact shifts across economies and ESG rating systems is vital for aligning capital flows with sustainable outcomes. Without clarity, investors risk misjudging performance—and firms risk under- or over-investing in ESG. #ESG #Sustainability #CorporateFinance #ESGInvesting #ClimateFinance #StakeholderCapitalism #Governance #InternationalMarkets #RiskManagement

If you’ve ever wondered whether #ESG creates business value, this report has the answer. It cuts through the noise to show how ESG drives profit, reduces risk, and boosts competitiveness. With data and real cases, the KPMG study shows how ESG can shift from reporting to a real growth engine. 𝘏𝘦𝘳𝘦 𝘢𝘳𝘦 𝘵𝘩𝘦 𝘬𝘦𝘺 𝘵𝘢𝘬𝘦𝘢𝘸𝘢𝘺𝘴: 📈 Linking ESG to Value Creation → ESG leaders often outperform peers but clear value links remain limited. → ESG initiatives can lift profit margins, sales, and cost of capital. 📏 ESG Measurement Challenges → ESG data lacks transparency and varies across rating providers. → Most scores reflect policies rather than actual performance outcomes. → ESG ratings look backward and rarely predict future value. ✨ Quantifying ESG Benefits → ESG actions can influence investor sentiment and stock movement. → A bottom-up approach helps tie ESG to measurable business results. 💰 Areas with Highest Returns → Environmental initiatives like decarbonization yield direct financial gains. → Social and governance programs enhance trust, culture, and reputation. ⚙️ ESG and Financial Levers → ESG affects sales, margins, investments, taxes, and capital costs. → Good ESG lowers costs and risks, while weak ESG raises both. 🏷️ Business Case Examples → Renewable energy shifts reduce expenses and regulatory exposure. → Circular fashion models strengthen loyalty and increase brand value. → Sustainable innovation in pharma cuts waste and boosts profitability. 🎯 Embedding ESG Strategically → Integrating ESG into core strategy improves business resilience overall. → Linking executive pay to ESG goals ensures sustained accountability. → Cross-functional teams help target the most value-creating ESG areas. 🔗 Strengthening ESG Systems → ESG data should be tracked with the same rigor as financial data. → Embedding ESG in operations aligns profits with sustainability goals. → An ESG-aware culture boosts engagement across all stakeholders. This report is a reminder that ESG success is not about doing more, but about doing what matters most. Every decision, from energy use to employee engagement, carries financial weight. The real question is no longer whether ESG adds value, but how fast it can be aligned with #strategy.

Deep Dive #1 – From "Nice to Have" to Financial Alpha If you still think ESG is just a PR exercise, you’re missing the financial signal. After 1.5 years at Columbia, one thing became clear: the "Value vs. Values" debate is over. Environmental and social factors aren't externalities—they're core drivers of risk and valuation. In my first Deep Dive, I’m exploring Financial Materiality – Why sustainability metrics are becoming primary, not secondary, inputs in investment models? It’s a simple but powerful truth: sustainability factors directly impact financial performance, and investors are increasingly using SASB-based materiality metrics to identify which issues will move the needle. Why does this matter for strategy? 1.   Risk Mitigation: Climate risk is financial risk. Identifying key material issues is essential for risk management. Companies that don't account for supply chain disruption or regulatory shifts are effectively "unhedged." 2.   Operational Efficiency: Sustainability often signals management quality. High-efficiency firms with lower waste, lower energy intensity, and green revenue streams typically outperform peers on margins and show greater resilience in downturns. 3.   Cost of Capital: Firms with robust ESG performance are accessing cheaper debt and equity. Investors aren't being "nice"—they're pricing in lower risk. But here's the key: Not all ESG issues are material to every firm. Relevance varies by industry and company. A 2016 study by Khan, George Serafeim, and Yoon found that companies with strong performance on material ESG topics significantly outperformed peers, while performance on immaterial topics showed no correlation—or even detracted value. Research from Schroders and Saïd Business School, University of Oxford, reinforces this: impact materiality can be a genuine source of alpha. Bottom Line: You cannot build a long-term financial strategy while ignoring the physical and social realities of the world we operate in. We are moving towards Double Materiality * Outside-In: How sustainability issues affect the company's value. * Inside-Out: How the company’s actions affect the environment and society. Picture: Another high point at Columbia was attending #ClosingBell at Nasdaq and learning about the Nasdaq Metrio™, a SaaS-based, end-to-end platform that helps firms to better collect, measure, and report sustainability data. For the finance professionals, are you currently integrating materiality-based ESG metrics into your valuation models? If so, which frameworks are you using? Let's discuss in the comments. 👇 Columbia University Sustainability Management #SustainableFinance #FinancialMateriality #ESGInvesting #CorporateStrategy # #DoubleMateriality

ESG is not a constraint on growth; it is a catalyst for trust, stability, and long-term value. In today’s markets, Environmental, Social, and Governance principles are often misunderstood as compliance burdens or political narratives. However, when applied prudentially and contextually, ESG strengthens the core mechanics of capital formation abd enhances trust in capital by increasing transparency, aligning incentives, and reducing information asymmetries. This allows investors to price risk more accurately and provides institutions with clearer signals about long-term performance and resilience. For banks and financial intermediaries, ESG represents an opportunity, not a cost. By integrating ESG metrics into risk management, credit processes, and product design, banks can create durable, sustainable fee income while supporting economic sectors that are resilient, future-ready, and socially valuable. Transition economies should embrace ESG rather than shy away from it. When applied with prudence and contextual understanding, ESG does not hinder industrialization or growth. Instead, it improves governance, widens and diversifies funding and attracts higher-quality capital, and accelerates the structural reforms essential for global competitiveness. Moreover, ESG encourages a deeper understanding of profit—not to diminish it, but to comprehend it more fully. Profit grounded in transparency, stewardship, and long-term value is more resilient, investable, and sustainable. This type of profit strengthens markets, builds trust, and supports durable economic development. At the macro level, an economy that embeds ESG discipline grows stronger. Better governance lowers systemic risk, environmental stewardship reduces volatility, and social investment strengthens human capital. Together, these factors accelerate sustainable development and enhance a country’s competitiveness. ESG, understood correctly, is financial discipline applied to the real world. It transforms capital into an engine of sustainable and less volatile returns. #esg Qazaqstan Investment Corporation Clearbrook

New paper, "Sustainable Investing: Evidence From the Field" (with Tom Gosling and Dirk Jenter). We survey 509 equity portfolio managers, of both traditional and sustainable funds, on whether, why, and how they incorporate firms’ environmental and social performance into investment decisions. 1. Both traditional and sustainable funds rank ES last out of six drivers of long-term value: below strategy, operational performance, governance, culture, and capital structure in that order. Clients interested in financial returns should not overweight a fund's ES credentials above its ability to assess these other factors. 2. This low relative ranking doesn't mean that ES is immaterial in absolute terms. Indeed, 73% of sustainable and even 45% of traditional investors expect ES leaders to deliver positive alpha. Unexpectedly, the most popular reason is that ES is a signal for other important value drivers rather than mattering directly. As I wrote in "The End of ESG", ES is "extremely important and nothing special". 3. ES performance influences stock selection, engagement, and voting for 77% of investors (66% traditional, 91% sustainable). Calls to "ban ES" make little sense as many traditional investors voluntarily incorporate it. 4. Only 24% of traditional and 30% of sustainable investors would sacrificing even 1bp of annual return for ES, citing fiduciary duty concerns. Policymakers and the public need to have realistic expectations of the asset management industry's likely ES impact. It will incorporate financially material ES factors, but it won't subsidize ES investments that offer below-market returns. That’s not because fund managers are greenwashing, but because they are fund managers. Their fiduciary duty is to their clients, whose goals are often financial. 5. But non-financial goals can be pursued through ES constraints such as fund mandates. 71% (61% traditional, 84% sustainable) report that ES constraints required them to make different investment decisions. These constraints sometimes reduced the very ES impact they aim to achieve, for example by preventing funds from investing in ES laggards whose performance they could have improved. 6. Overall, traditional and sustainable investors are more similar than commonly believed. Sustainable investors recognise fiduciary duty and are unwilling to sacrifice financial returns for ES. Traditional investors view ES as material and face ES constraints (firmwide policies, client wishes) preventing investment in "unsustainable" stocks. While some clients are attracted by sustainability labels, many traditional funds invest sustainably and many sustainable ones don't - and chasing a label can prevent true sustainable investing. Big thanks to the those who filled in the survey, beta-tested it, distributed it, and were interviewed. We hope that by directly involving practitioners, we can increase the relevance of academic research. https://lnkd.in/eGzRzE5t

As I approach the completion of my second Masters in Economics, I wanted to share my dissertation work examining a question that is increasingly central to corporate strategy and capital markets: 𝐃𝐨 𝐄𝐒𝐆 𝐬𝐜𝐨𝐫𝐞𝐬 𝐭𝐫𝐚𝐧𝐬𝐥𝐚𝐭𝐞 𝐢𝐧𝐭𝐨 𝐦𝐞𝐚𝐬𝐮𝐫𝐚𝐛𝐥𝐞 𝐟𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐩𝐞𝐫𝐟𝐨𝐫𝐦𝐚𝐧𝐜𝐞, 𝐨𝐫 𝐝𝐨 𝐭𝐡𝐞𝐲 𝐫𝐞𝐦𝐚𝐢𝐧 𝐥𝐚𝐫𝐠𝐞𝐥𝐲 𝐬𝐢𝐠𝐧𝐚𝐥𝐢𝐧𝐠 𝐦𝐞𝐜𝐡𝐚𝐧𝐢𝐬𝐦𝐬? Using firm-level data from Indian listed companies, I conducted a structured empirical analysis to evaluate the relationship between ESG performance, operational profitability, and market valuation. 𝐊𝐞𝐲 𝐢𝐧𝐬𝐢𝐠𝐡𝐭𝐬: • ESG shows a clear positive impact on profitability, indicating stronger internal efficiency and governance • However, ESG has no significant impact on firm valuation, pointing to a gap between performance and market pricing • Traditional drivers like size and leverage continue to dominate valuation outcomes 𝐒𝐭𝐫𝐚𝐭𝐞𝐠𝐢𝐜 𝐓𝐚𝐤𝐞𝐚𝐰𝐚𝐲𝐬: • ESG is evolving from a reputational overlay to an operational performance lever, particularly through governance discipline and risk mitigation • There exists a clear lag between ESG adoption and market recognition, highlighting inefficiencies in how sustainability signals are interpreted by investors • In emerging markets like India, ESG may currently function more as a strategic differentiator in internal performance rather than a fully priced valuation driver 𝐓𝐡𝐞 𝐦𝐨𝐬𝐭 𝐢𝐦𝐩𝐨𝐫𝐭𝐚𝐧𝐭 𝐢𝐧𝐬𝐢𝐠𝐡𝐭 𝐟𝐨𝐫 𝐦𝐞: ESG is already influencing how firms operate, but markets are still catching up in how they value it. 𝐖𝐡𝐚𝐭 𝐧𝐞𝐱𝐭: As disclosure frameworks mature and investor awareness deepens, ESG is likely to transition from a performance lever to a priced market signal. I would truly value perspectives from those working across ESG, investing, and corporate strategy - especially on how this gap between performance and valuation is evolving in practice.

Are your ESG initiatives just feel-good projects, or part of a strategic program? Many companies fall into the trap of implementing random environmental or social efforts—like reducing paper use or launching a one-off green campaign—without tying them back to a bigger plan. These isolated acts might look good on paper but often lack long-term impact. That’s where an intentional ESG strategy comes in. Instead of scattered efforts, a well-crafted strategy aligns with your company’s core values, business goals, and culture. It’s not just about doing good; it’s about ensuring that every initiative is purposeful and contributes to the overall mission of the organization. I’ve worked with organizations where the first step in building an ESG strategy was reviewing their mission statement and values. When these elements serve as the foundation, the ESG program becomes a natural part of the organization, not a side project. From there, the real work begins: setting specific, measurable, and realistic goals. Take, for example, A company targeting net-zero carbon emissions by 2030. This isn’t a vague aspiration—it’s a concrete goal that can be tracked, measured, and reported. Using frameworks like the Science Based Targets initiative (SBTI) or the UN Sustainable Development Goals (SDGs) can help ensure that your goals are in line with global standards, making it easier to measure progress. But it doesn’t stop there. A successful ESG strategy requires ongoing commitment and alignment with stakeholder expectations. Regularly assessing progress and engaging key players—whether they’re investors, employees, or customers—helps keep the strategy relevant and impactful. So, Is your company making random ESG efforts, or are you crafting a strategy that reflects your values and drives real change? #ESG #Sustainability #BusinessStrategy #EnvironmentalImpact #CorporateResponsibility

𝐍𝐁𝐈𝐌’𝐬 𝐄𝐒𝐆 𝐒𝐭𝐫𝐚𝐭𝐞𝐠𝐲: 𝐒𝐦𝐚𝐫𝐭 𝐈𝐧𝐯𝐞𝐬𝐭𝐢𝐧𝐠, 𝐍𝐨𝐭 𝐏𝐨𝐥𝐢𝐭𝐢𝐜𝐬 𝐚𝐧𝐝 𝐩𝐫𝐨𝐭𝐞𝐜𝐭𝐢𝐧𝐠 𝐥𝐨𝐧𝐠-𝐭𝐞𝐫𝐦 𝐯𝐚𝐥𝐮𝐞. I’ve been following Norges Bank Investment Management (NBIM) closely, and their approach to #ESG is a masterclass in long-term, risk-based investing. Managing $1.7 trillion, they don’t see ESG as a "nice-to-have,” they see it as a financial necessity. 🔹 1. 𝑬𝑺𝑮 𝒂𝒔 𝑹𝒊𝒔𝒌 𝑴𝒂𝒏𝒂𝒈𝒆𝒎𝒆𝒏𝒕 NBIM holds 1.5% of global equities, meaning their returns are directly tied to how well the world economy handles #climatechange, #biodiversity loss, and #social #inequality. If companies ignore these risks, their valuations—and NBIM’s investments—suffer. 🔹2. 𝑪𝒍𝒊𝒎𝒂𝒕𝒆 𝑨𝒄𝒕𝒊𝒐𝒏 𝑷𝒍𝒂𝒏 (2022-2025) Their strategy is crystal clear: ✅ Push for net-zero by 2050 ✅ Engage with the 170 biggest emitters (responsible for 70% of portfolio emissions) ✅ Advocate for stronger climate policies 🔹 3. 𝑬𝒏𝒈𝒂𝒈𝒆𝒎𝒆𝒏𝒕 𝑶𝒗𝒆𝒓 𝑫𝒊𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 NBIM doesn’t just walk away from high-emission industries. Instead, they push for real change, meeting with 3,000+ companies in 2023 alone. But they’re not afraid to cut ties—150 companies have been dropped due to unsustainable business models. 🔹 4. 𝑨𝒄𝒕𝒊𝒗𝒆 𝑶𝒘𝒏𝒆𝒓𝒔𝒉𝒊𝒑 & 𝑪𝒍𝒊𝒎𝒂𝒕𝒆 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 They’re using their influence to: 📌 Vote on climate resolutions 📌 Push for science-based targets 📌 Invest in renewables & low-carbon tech 💡 While some investors shy away from ESG, NBIM is doubling down—because this isn’t about ideology, it’s about financial resilience. ❓ 𝖶𝗁𝖺𝗍 𝖽𝗈 𝗒𝗈𝗎 𝗍𝗁𝗂𝗇𝗄 𝗌𝗁𝗈𝗎𝗅𝖽 𝗂𝗇𝗏𝖾𝗌𝗍𝗈𝗋𝗌 𝗉𝗋𝗂𝗈𝗋𝗂𝗍𝗂𝗓𝖾 𝖾𝗇𝗀𝖺𝗀𝖾𝗆𝖾𝗇𝗍 𝗈𝗋 𝖽𝗂𝗏𝖾𝗌𝗍𝗆𝖾𝗇𝗍 𝗐𝗁𝖾𝗇 𝗍𝖺𝖼𝗄𝗅𝗂𝗇𝗀 𝖤𝖲𝖦 𝗋𝗂𝗌𝗄𝗌? 𝖫𝖾𝗍’𝗌 𝖽𝗂𝗌𝖼𝗎𝗌𝗌. 👇