Higher share prices reflect companies with good environmental, social and governance practices

There’s no formula, yet it proves the positive impact of good environmental, social and governance (ESG) practices on a company’s share price. Regulators and stakeholders have little doubt that such a link exists.

Supporting that view, the Hang Seng Corporate Sustainability Index, introduced by Hong Kong’s stock exchange, closely monitors a number of key performance indicators (KPIs) for 30 companies known for their early commitment to voluntary ESG disclosure. A study of share-price movements over the past five years show they have outperformed the constituent stocks of the Hang Seng Index, an outcome which can hardly be put down to coincidence or other extraneous factors.

“We can reference similar studies in the United States and China,” says Patrick Lo, risk advisory partner at RSM Hong Kong. “Companies with good ESG policies and practices typically have a better share price performance.”

Elements at work include increased investor confidence resulting from the perceived focus on correct corporate governance and risk management, reducing the chance of ill-conceived or ad hoc decision making. This can lead to better scores from credit rating agencies, meaning lower finance costs and making it easier to raise funds in the capital markets.

In parallel, an in-house culture built on product quality, customer loyalty, staff engagement and sustainability provides the foundation for operating efficiencies, reliability and improved profitability.

“Good ESG reporting leads to greater transparency on how the board is discharging its responsibilities,” Lo says. “It also helps the directors, executive and non-executive, form a good understanding of all stakeholders’ expectations. Their job is to ensure adequate internal control measures as a watchdog, but also to help senior management make sound decisions which enhance value and reflect long-term priorities and new ways of thinking.”