How ESG Investments Drive Corporate Financial Success

Uzone.id – In a recent scientific article on the Frontiers platform, Tao Fu from the School of Urban Economics and Management at Beijing University of Civil Engineering and Architecture delves into the impact of ESG investments on corporate financial performance.

Environmental, Social, and Governance (ESG) is a framework that guides companies in incorporating environmental responsibility, social impact, and governance integrity into their investment decisions. 

More than just a metric, ESG serves as a strategic tool to ensure that a company’s investments create a positive social impact while aligning with sustainable practices.

This focus on ESG reflects a growing awareness among investors of the need for sustainable business models. As a result, companies are increasingly adopting ESG guidelines as part of their long-term decision-making, driven by the understanding that sustainable practices can strengthen financial performance and build long-lasting value.

Currently, many company leaders are using the ESG concept as a strategy to improve their company’s financial performance. Research conducted by Tao Fu found that ESG has a positive impact on financial performance, especially in non-state-owned companies.

In a document published by the NYU Stern School of Business, they drew several conclusions involving the relationship between ESG and financial performance as follows: 

1. Improved financial performance in companies that use the ESG concept has a real impact in the longer term.
2. ESG initiatives aim to encourage better financial performance.
3. ESG initiatives protect against declines during social and economic crises through better management of risks through various innovations.
4. Many studies have shown that managing a low-carbon future will improve financial performance.

Based on data released by many studies related to the impact of ESG Investments on corporate financial performance, almost all companies now need to implement financial strategies that consider ESG factors.

Each ESG component has a significant impact on the company’s sustainability. First is Environmental: in this case, the company must understand its responsibility to the environment, including waste and emission management, natural resource conservation, and the use of renewable energy.

Second, social. ESG will encourage entrepreneurs to pay attention to the welfare of employees under their company, actively participate in local communities through social projects, emphasize fairness, and implement policies that ensure that the rights of every employee are respected.

Third is governance, which is the foundation of business sustainability. If a company implements the ESG concept, it must be transparent and provide precise and open reports. 

The company is also expected to be led by leaders with integrity and ethical business practices. Lastly, the company is encouraged to have a sound risk control system and comply with the law.

In addition, companies will receive many positive impacts if they implement a financial strategy that uses the ESG concept. Here are some of them: 

1. Companies that implement a financial strategy with the ESG concept have a positive image in the eyes of customers and investors.
2. Currently, investors are also paying more attention to companies that implement ESG practices because these companies have lower risks and are sustainable in the long term.
3. According to many studies, research conducting SDG uses lower capital, reduces risk, and improves operational performance.

Although many studies show that the relationship between ESG investment will have a positive impact, few of them find a negative impact on the relationship between ESG investment and corporate finance.

This includes the negative impact on financial performance in the short term because the company’s costs are also not small. If the company is not ready, it could backfire. In addition, the lack of standard metrics to measure ESG performance makes many investors assess it accurately.

In some cases, companies will find it difficult to gain sympathy and trust from investors because they have to face skepticism about their ESG commitments in the market and in the eyes of investors.

Whether positive or negative impacts, the relationship between ESG investment and the company’s financial performance regarding the effects received varies. 

So, companies that intend to use the ESG concept must focus on a long-term strategy that aligns with their business goals to maximize social responsibility and financial success.