Lowering Your Cost of Capital Through Effective ESG Disclosure – Part II

Part II:  The inseparable link between ESG performance and investor demand impacts a company’s cost of capital: “The cost of debt for ‘good’ versus ‘bad’ companies based on ESG scores can be nearly two full percentage points lower.”

The implication of prevailing ESG trends within the global investment community is enormous for virtually any company, as the ability to compete for capital increasingly depends on ESG performance, not financial performance alone, and with both now practically inseparable. Accordingly, securing debt and equity capital, and doing so at the lowest possible cost, increasingly requires companies to report detailed ESG metrics required by a growing number of investors who, in turn, need to adequately measure and monitor issuers’ ESG performance. That’s because they are either a mainstream investor that is progressively using more of this information to assess implied risk or a values-based investor that needs to determine if the company meets its criteria or should be avoided.

Companies that remain insufficiently transparent will increasingly be overlooked by investors or be inaccurately assessed by portfolio managers, bank analysts, index providers or the ratings firms that supply ESG ratings; in the upcoming part of this blog we explain what information these stakeholders and market influencers require. These two factors can lead to a company’s stock being undervalued and/or higher interest rates on its debt. In other words, insufficient ESG disclosure has a serious bearing on a company’s cost of capital and places it at an unnecessary disadvantage. According to the 2017 SwissRe report Responsible Investments: Shaping the future of investing, “….a shift [by investors] to ESG benchmarks would lead to a smaller investment universe and hence lower demand for the excluded securities….Consequently, ESG factors will have an impact on company valuation and cost of capital, and as such become an integral part of financial analysis.” While Bank of America Merrill Lynch quantifies the impact in its September 2019 report ESG Matters: Ten reasons you should care about ESG: “The cost of debt[1] for ‘good’ versus ‘bad’ companies based on ESG scores can be nearly two full percentage points lower.”

 

The InspIR Group can help you learn more about ESG reporting.  Call or email us if you would like to set up a workshop for management or discuss customized projects to initiate your journey to develop best practices in ESG reporting.

Ivan Peill, New York – ivan@inspirgroup.com, +1 212.710.9296

Fabiane Goldstein, São Paulo – fabiane@inspirgroup.com, +55.11.98103.0201

 

[1] Based on weighted average option-adjusted spread

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