Use of ESG Social and Corporate Governance

Question: Argue against the use of ESG to value companiesProvide 2 well-founded arguments - including citations from at least three academic papers per argument - to support the case against the use of ESG criteria in the company valuation process. Answer: Abstruct ESG refers to environmental, social and corporate governance. The expression ESG materialized globally in the recent past and has widely been used by investors while evaluating businesses in the perspective of corporate behaviour. The term basically highlights an organizations effort in regards to the environmental conservation, social responsibility like giving back to the community and the its internal governance as it relates to management appraisal and employees welfare. There are no specific ESG matters as such but they more or less exhibit traits like: Address subjects that have conventionally been taken as none financial with a medium or lasting prospects. Qualitative substance that cannot out rightly be quantified in financial requisites. Focus on externalities (expenses incurred by other companies or by the public at large) that haven't been caught by market instrument. Introduction The discussion on whether taking into consideration environmental, Social and Governance (ESG) aspects can improve a company's financial returns has been going on among institutional investors for nearly twenty years now. The cynic assert that the phenomenon termed as 'Socially Responsible Investing' (SRI) does not uphold elemental scrutiny, constrain the investable world, and operates opposite to the doctrines of current Portfolio Theory. Supporters on the hand inform that markets do not simply value ESG prepositions owing to the fact that they are geared towards addressing long-term perils that are yet to infiltrate into the current economy. A lot of research has gone into the subject others supporting while others opposing the argument. This article seeks to counter the argument by uncovering reasons why the ESG phenomenon is not sufficient enough to be employed in company valuation. Returns In reality there are no connections existing between a company's return and ESG reporting. Studies indicate that that the five companies with the uppermost profits in APGs portfolio did not report on ESG matters. Contrary, the five organizations with the utmost standard of ESG exposure had recorded downbeat income(Krosinsky et al. 2012). In my opinion, it's clear that detailed reporting and exposing ESG information and the ultimate ESG incorporation does not necessarily bring any difference with organization that do follow the norm. The practices of ESG themselves should be encouraged as generally it leads to improved social status and also environmental sustainability, however, when it comes to company valuation ESG cannot be quantified as a metric to measure companies. For instance, companies involved in oil and other mining exploration may inherently score poorly in the ESG based scale, however the impacts of the said institutions in their national economies are by far not attainable by companies scoring high in ESG scale. Take for instance, Saudi Arabia's economy which overly inclined towards oil as the greatest almost sole contributor to the GDP, the oil burned is presumably among the biggest contributor to global warming, yet the companies involved sustain the people of the nation(El Mallakh, 2015). Company valuation While it is common sense to honor companies that value ESG reporting, its utter mistake to under value a company based on its ESG performance. Studies indicate that its not yet clear whether observing ESG has any future economic returns in the future (Nagy et al., 2013). Pitt-Watson(2015), cautions that it may be a good sign if companies exposing their ESG were valued higher, but in truth they were not. If there existed were a relationship between the two, organizations not reporting ESG would run low on hedge funds relative to those reporting. However, the reality is that not one of the one thousand two hundred companies started by hedge funds in the United Kingdom in 2012 employed the move. Conclusions From these paper and other scholarly materials its evident that the ESG phenomenon is still in its toddler stages. There is no conclusive evidence to pin down its long term value addition prospects to an organization and therefore not the best metric as far as the company value is concerned. The argument discovered that the affiliation between ESG reporting and valuation is still blurred. Evidently, we are still at the infant stages. However, global trends like climate change and resource shortage, make the shift towards ESG incorporation and better ESG expos irrevocable. References El Mallakh, R., 2015. Saudi Arabia: Rush to Development (RLE Economy of Middle East): Profile of an Energy Economy and Investment. Routledge. Krosinsky, C. and Robins, N. eds., 2012. Sustainable investing: The art of long-term performance. Routledge. Nagy, Z., Cogan, D.G. and Sinnreich, D., 2013. Optimizing Environmental, Social and Governance Factors in Portfolio Construction: Analysis of three ESG-tilted strategies. Social and Governance Factors in Portfolio Construction: Analysis of Three ESG-Tilted Strategies (February 20, 2013). UNEP, F., 2010. Translating ESG into Sustainable Business ValueKey Insights for Companies and Investors.