Companies that outperform in industry-relevant environmental, social, and governance (ESG) areas boast higher valuation multiples such as price-to-earnings ratios, and profit margins, all other factors being equal, than those with weaker performance in those areas. This is the main conclusion of one of the BCG's latest reports, titled "Total Societal Impact: A New Lens for Strategy".
The research comes out as companies are being urged to pay closer attention to their overall role in society. In A this environment, companies should factor what The Boston Consulting Group calls "Total Societal Impact" (TSI) into their corporate strategies. TSI is the total benefit to society from a company's products, services, operations, core capabilities, and activities. TSI is the aggregate of all the ways in which a company impacts society--and currently no single metric captures that. However, performance in important ESG areas is a good starting point for understanding a company's TSI--providing a concrete way to assess the link between a company's TSI and its financial performance.
The report examines companies in four industries: consumer packaged goods, biopharmaceuticals, oil and gas, and retail and commercial banking. In each of those groups, top performers in specific ESG topics enjoyed valuation multiples that were 3% to 19% higher, all else being equal, than those of the median performers in their same sector.
Besides, top performers in certain ESG topics had margins that were up to 12.4 percentage points higher, all else...