ESG stocks are less risky
The one thing that all of these studies have in common is that the reason for the lower final and systematic risk comes down to the ESG factors themselves and how they relate to business performance.
There are a variety of ESG inputs within a business structure, such as climate change and carbon emissions, energy efficiency, data protection and privacy, labor standards, bribery and corruption , and audit structures. When companies do these things well, they are rewarded.
On the business side, this translates in a variety of ways depending on performance. ESG-Revenue-driven companies tend to have lower earnings, revenue, and cash flow volatility. This translates into stronger dividends as well as lower borrowing costs for the capital needed. Meanwhile, companies with ESG scores provide reduced regulatory and legal interventions/costs as well as cited increases in employee productivity/satisfaction.
The end result is that all of these enterprise-level boosts via ESG result in better increases in the level of investors. Because they “do better” on the business side, investors reward ESG-heavy stocks above their peers. Stable cash flow means that when times get tough, investors don’t have to worry and they don’t abandon these stocks. Higher dividends provide a cushion.
With that, ESG stocks are rewarded with a lower risk profile compared to the regular market. The data indicates this is the case across a variety of asset classes and geographies.
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