Interest in environmental, social, and corporate governance issues has grown in recent years. According to Managermagazin 12/2020, more than a third of asset managers’ funds are currently invested in sustainable companies. To attract these investors, companies need top marks in the area of ESG. Analysts estimate that two billion dollars will be spent annually on ratings and consulting in the future. For this reason, the i-unit group’s rating already includes ESG components.
Explanation of the three aspects
The environmental aspect of ESG criteria assesses how a company treats its biological environment. The specific assessments are currently based largely on companies’ sustainability reports. Factors such as waste production, water and energy consumption, and pollutant emissions are used for the assessment.
Companies deal with social environments and their internal and external processes. Recognized issues such as working conditions, human rights, and consumer protection are addressed in the ESG social aspect.
The third area of ESG is corporate governance. Management structures, profit sharing, and salary regulation all play a role here. Corporate scandals in particular make it necessary to take a close look at corporate governance. These scandals can usually be traced back to management structures and regulations.
The influence of ESG factors on companies
Studies have shown that companies that take these three factors into account have lower risk, higher profitability, and higher growth. This improves a company’s risk-return profile. Companies with high ESG ratings have lower volatility and systematic risk, as well as better operational performance. Capital costs are lower and free cash flow increases. The real estate sector is an exception to these developments, as it is hardly influenced by ESG factors.
Consulting enables customers to minimize their risks in the areas discussed and to tap into potential sources of income. Topics include the implementation of ESG risk management and the sustainable orientation of corporate strategy. When it comes to corporate strategy, the entire value chain must be taken into account. The associated investments should also contribute to the diversification of the portfolio. The application of ESG and the improvement of the company’s image are intended to build loyalty among existing and new customers.
Practical applications of ESG criteria
ESG serves as a basis and sets a standard for assessing companies based on social and environmental aspects. ESG criteria include new assessment approaches and influence bank ratings and corporate reputations.
The teams at i-unit group advise clients on how to minimize ESG risks while tapping into new revenue potential. Companies with a negative reputation are supported through the implementation of ESG risk management.
It is important to consider the potential impact on the company’s reputation, as well as the impact on the bank rating, where the proportion of so-called soft factors has grown steadily.
Connection between ESG and the indicative rating of the i-unit group
The i-unit group integrates ESG factors and other so-called soft facts into its indicative rating. These standards lead to an appropriate rating assessment in the interests of the company and have further implications for its options for action. With these factors and soft facts, banks do not assume “ignorance” to the detriment of the company.
The following chart shows further areas of consulting according to ESG criteria:
The trend toward taking ESG criteria into account is present in almost all areas of the economy and is growing in importance from year to year. It remains to be seen how the system will develop further, particularly in the area of company valuation, and to what extent it will find its way into the practice of bank ratings.
Would you like advice on ESG criteria? Then please feel free to contact us!
Tel. +49 531 180 59 300
E-Mail: info@i-unit.de
