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The performance of companies against environmental, social and governance criteria is increasingly impacting stock market valuations and is expected to be central to creating value in a changing economy.

Many companies have long thought their impact on broader society to be an important issue, but the extent to which it has been considered a core strategic question is debatable. This is something that is changing fast.

Not only is there increasing pressure from consumers, regulators and policy-makers for companies to move to more sustainable business models — particularly in relation to decarbonisation — but also, perhaps more potently, there are growing signs that it is having, and will have, a substantial financial impact.

There is already evidence that companies that are being proactive and committing to meaningful progress in this area, or those that already have sustainability as a core part of their business model, are being rewarded with better stock market valuations. Companies that are not rated highly on environmental, social and corporate governance (ESG) issues are also increasingly likely to fall foul of the growing ESG investor base. Many large investors now integrate ESG considerations into their investment decision-making and risk management. Markets have already started to turn against some of the heaviest carbon-producing industries, and it is expected that an increasing range of sectors (if they fail to demonstrate credible transition plans) will struggle with a higher cost of capital or perhaps to even access any capital at all.

The fallout from this will need to be managed carefully. The temptation is for companies to simply spin-off (or attempt to spin-off) assets that are no longer thought of favourably in this context. However, that will only move the problem elsewhere, or create new problems if assets, such as carbon-heavy power production, which still plays an important role in the current economy, become defunct before adequate replacement technologies are in place.

The most successful companies are likely to be those that engage with the opportunities of this agenda, rather than thinking solely in terms of liabilities to be managed. Many sectors are already experiencing significant disruptive change and consumers are placing greater emphasis on purchasing goods and services that align to their values. With that in mind, companies need to ask themselves the difficult questions now, so that they can have a role in the emerging economy of the future.

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