Does ESG Contribute to Corporate Growth? An Expert Explains the Relationship with Stock Prices and the Importance of "Communication"

ESG has become an indispensable concept when considering corporate growth. While it has seen rapid expansion over the past decade, how exactly does ESG influence a company's stock price and market value? And what kind of initiatives are truly effective? Many companies likely harbor such questions.

The webinar " The Relationship Between ESG and Stock Prices: What You Need to Know Now," co-hosted by Economics Design Inc. and Dentsu Inc. Sustainability Consulting Office, began with opening remarks by Mr. Makoto Imai, Co-founder and Representative Director of Economics Design, and Mr. Yasutoshi Sumida, Head of Dentsu Inc. Sustainability Consulting Office. This was followed by presentations from Mr. Tatsuyoshi Okimoto (Professor, Faculty of Economics, Keio University / Principal, Economics Design), Takaaki Yasuda (Professor, Faculty of Policy Management, Keio University), and Yosuke Yasuda (Professor, Faculty of Economics, Osaka University / Co-founder, Economics Design), along with Atsushi Kanie and Soichi Ono from Dentsu Inc. Part 1 explored the relationship between ESG and stock prices based on recent research findings. Part 2 discussed challenges faced by companies implementing ESG initiatives and the importance of storytelling in communicating business value. Here is a recap of the proceedings.

What is the relationship between ESG and corporate value? Unraveling industry-specific trends

In Part 1 of the webinar, Ryuji Okimoto, a renowned authority in financial econometrics, and Jun Kanie of Dentsu Inc. took the stage. Under the theme "ESG Evaluation and Corporate Value," Okimoto introduced three recent research findings. One of these investigated the relationship between carbon dioxide emissions—a topic representative of the "Environment" aspect of ESG—and corporate credit risk.

Okimoto: In recent years, discussions have progressed regarding stricter regulations on carbon emissions and the introduction of decarbonization taxes, meaning corporate carbon emissions now carry carbon risk. This study used CDS (Credit Default Swaps: financial derivatives that trade credit risk) to verify whether a CRP (Carbon Risk Premium: the impact of carbon emissions on corporate management risk; as CO₂ emissions increase, financial instruments like stocks require higher returns) actually exists in financial markets.

The following graph illustrates the results.

Okimoto: Looking at these results, historically, high carbon emissions were seen as evidence of a company's economic activity, so companies with higher emissions had lower credit risk. However, with the development of ESG investing and investors becoming aware of carbon risk, the negative relationship between CDS and carbon emissions has been negated. In recent years, a clear relationship is no longer apparent.

Kanie: So, while high carbon emissions used to enhance a company's creditworthiness, this effect rapidly diminished around 2005-2006.

This result varies significantly by sector. Okimoto pointed out that sectors with high costs for reducing emissions, such as energy and materials, tend to have lower CRP, while sectors where reduction is relatively easier, like healthcare and telecommunications, have higher CRP.

Okimoto: As consumer awareness of ESG grows, the latter sectors have a higher potential for emissions reduction to enhance brand image and drive corporate performance. Consequently, companies failing to effectively leverage this fact face higher CRP.

Next, we introduce research evaluating corporate value through ESG from a stock market perspective. The graph below shows analysis results for 1,200 international companies from 2002 to 2019.

Okimoto: Looking at these results, a positive relationship between ESG and corporate value began to emerge around 2010, and this relationship has become increasingly clear in recent years.

Okimoto: As shown in the graph above, the effect varies significantly by sector. Sectors where ESG initiatives are easier to implement and where companies have close ties with consumers and investors—such as consumer goods, daily necessities, and healthcare—show a greater impact of ESG ratings on corporate value.

Furthermore, differences in market valuation exist not only by sector but also depending on the specific ESG initiatives a company pursues. Recently, there's a growing emphasis on items directly linked to social issues—such as women's empowerment and human rights—in addition to carbon emissions. These are also considered highly likely to influence market valuation.

Kanie: Initially, environmental issues received the most attention within ESG, but as society has changed, interest has broadened to encompass all aspects of ESG since around 2010.

Okimoto: I believe it's crucial to first identify which ESG initiatives can reduce risks and enhance long-term performance for your company, and then communicate these efforts to the market.

How to Communicate Corporate Value? Effective Storytelling

While ESG is suggested to contribute to enhancing corporate value, looking at individual companies, whether specific initiatives succeed or fail is thought to be significantly influenced by how their story is "told." In Part 2 of the webinar, three speakers took the stage: management scholar Takaaki Yasuda, economist Yosuke Yasuda, and Soichi Ono from Dentsu Inc. They held a panel discussion under the theme "Storytelling in an Age of Communication Challenges."

Mr. Yasuda, who has long worked in capital markets and now researches ESG and corporate financial strategy in academia, introduced the concept of PPM (Product Portfolio Management) using the diagram below. He proposed that ESG falls into the "problem child" category—areas with high market growth rates but low market share—and suggested Japanese companies should invest human capital into such businesses.

Yasuda: In fact, a major American corporation achieved growth by reevaluating where it allocated human capital and significantly restructuring its business. It now holds top-tier ESG scores and has seen its market capitalization increase by 1.5 times, reflecting higher valuation in the stock market.

On the other hand, it's said that among ESG ventures, there are cases where ESG initiatives haven't translated into improved profit margins or stock market valuation.

Yasuda: For example, a new shoe manufacturer has a compelling story: all materials used in their shoes are regenerative, and they aim to make the entire shoe industry regenerative by sharing their know-how with other companies. Despite this, their current stock price has fallen to one-tenth of its peak value.

Given this situation, Mr. Yasuda posed the question: "Is ESG ultimately just a tool for large corporations to tell convenient stories?"

Next, Mr. Yasuda, who also serves on government committees related to carbon pricing, GX (green transformation), and ESG, presented the chart below to point out the challenges faced by companies from the perspective of the difference between ESG-investing companies and purpose-driven companies.

Yasuda: ESG-investing companies aim to maximize profits just like traditional companies, but they are constrained by the requirement to realize a certain level of social value (v) from an ESG perspective. On the other hand, purpose-driven companies, which we often hear about these days, aim to maximize the shared value (v*) they want to realize, and they are constrained by the requirement to achieve a certain level of profit in order to survive as a company.

The key difference, Mr. Yasuda explains, is that while the former has its social value imposed externally by investors or rating agencies, the latter can define its shared value independently.

Yasuda: Both have advantages and disadvantages. ESG investment-oriented companies face the challenge of how to adjust externally imposed values amid inconsistencies in ESG evaluation criteria. Purpose-driven companies, on the other hand, sometimes use the lofty goal of realizing shared value (v*) as an excuse for poor profitability. Ultimately, I feel the challenge lies in the tendency for pursuing purpose to lead to a smaller market share, creating a dilemma where social value cannot be realized.

Amidst the presentation of ESG challenges specific to each corporate type, Mr. Ono, Creative Director at Dentsu Inc., emphasizes the importance of storytelling.

Ono: It's no exaggeration to say that in the coming era, simply making good products won't be enough. I believe we're entering a time where companies must earnestly communicate their situation and initiatives to all stakeholders—employees, partners, shareholders, consumers—to gain understanding. Only then can they sustain positive relationships and sell their products.

Ono: In this context, a common concern we hear is, "We're doing the right and good things with our ESG initiatives, but it's not getting through." We also see disconnects between internal and external perceptions—differences in awareness between departments within the company, or initiatives undertaken with pride internally failing to reach consumers and shareholders. What matters, I believe, is for the company to craft a credible story that everyone can believe in, while ensuring each internal section effectively communicates that story to their respective audiences within their own roles.

ESG, in essence, is a non-financial metric. It's also an initiative that's difficult to quantify numerically. How can the expertise cultivated in advertising creative be leveraged to communicate its value to stakeholders?

Ono: The essence of advertising is conveying a message simply in 15 or 30 seconds. When companies try to communicate "the right thing," it tends to get lengthy. By stripping that down as much as possible and making it catchy in a single phrase, it becomes easier to reach all stakeholders, including employees and consumers.

Deepening our understanding of the relationship between ESG and corporate value will be crucial for companies considering which ESG areas to prioritize and what approaches to take moving forward. Correctly grasping the connection between ESG and stock prices could even lead to greater enjoyment in business and new challenges. It seems clear that engaging, exciting communication is needed to continuously convey a company's unique selling points.