In recent years, ESG has rapidly gone from being seen as a niche investment philosophy to a business necessity. In the latest Nordea On Your Mind, "ESG: Reaping the rewards", Nordea Thematics delves into the role of ESG ratings and their relationship to companies' financial performance.
Nordea On Your Mind is the flagship publication of Nordea Investment Banking’s Thematics team, which produces research for large corporate and institutional clients. The research does not contain investment advice and typically covers topics of a strategic and long-term nature, which can affect corporate financial performance.
Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year. The publication’s themes vary widely, and many are selected from suggestions by clients. Examples of covered topics include artificial intelligence, wage inflation, M&A, e-commerce, income inequality, ESG, cybersecurity and corporate leverage.
From niche to mainstream to necessity
The first ESG-themed Nordea On Your Mind report was published in 2017. At that time, Nordea Thematics thought momentum was strong, but the trend has exploded since then. Powerful ESG drivers include evidence of climate change, regulatory changes such as the EU Action Plan for financing sustainable growth, growing consumer demand for sustainable consumption and investment policies for saving, along with evidence of the significant costs associated with ESG failures and incidents. Starting out as a niche investment philosophy, ESG is increasingly seen as a necessity for having a long-term, viable business and qualifying for funding. As an illustration of ESG’s popularity, Nordea Thematics notes that global issuance of sustainable bonds has grown almost fivefold since 2016, up to nearly USD 500bn in 2020.
How to show you are sustainable: ESG ratings
An ESG rating can be a useful yardstick for the outside world to gauge a company’s ESG performance. It is a rapidly evolving field, increasingly dominated by a handful of global rating providers.
ESG ratings are a complement to credit ratings. They measure different metrics, and methodologies and scores vary among ESG rating providers. Corporate engagement with providers’ unsolicited rating has increased dramatically, as they realise this helps them prepare for additional suitability dialogues with investors and stakeholders. Corporates should consider the transparency, effort and costs associated with solicited and unsolicited ESG rating and weigh these against the potential benefits, taking advice as needed.
Strong ESG rating scores are rewarded with financial outperformance
To determine if sustainability pays off financially, we analyse a global dataset of the 10,000 listed companies comprising MSCI’s ESG-rated universe for the period 2015-21. Nordea Thematics finds a strong correlation between ESG rating scores and key financial metrics, such as total shareholder returns, returns on capital, share price volatility and maximum drawdown during market shocks. The analysis shows that companies with a stronger ESG performance tend to come out ahead, both in value creation and in resilience during times of market turbulence.
What the experts have to say
In the forward of the Nordea On Your Mind report “ESG: Reaping the rewards”, Nordea’s Head of Sustainable Finance Advisory Jacob Michaelsen lays out the maturing business case for sustainability. Nordea Thematics has also interviewed representatives of the two leading global ESG rating providers: Remy Briand, Managing Director and Head of ESG Solutions at MSCI; and Bob Mann, President and COO at Sustainalytics. From Nordea Equities, Head of ESG Research Marco Kisic and ESG Analyst Viktoria Voskressenskaia make the case for sustainability and ESG ratings.
If you are a corporate client and want to access the full Nordea On Your Mind report, please contact Viktor Sonebäck.
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