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(Mark Hulbert, an author and longtime investment columnist, is the founder of the Hulbert Financial Digest; his Hulbert Ratings audits investment newsletter returns.)
CHAPEL HILL, N.C. (Callaway Climate Insights) — Good news from the ESG investing arena: Our investment decisions are having a significant real-world impact.
New data shows that companies rated higher according to ESG criteria have a lower cost of capital than firms with lower ratings. Because of that lower cost, highly-rated ESG companies are able to undertake initiatives that would otherwise have remained unprofitable and never pursued.
I reached this conclusion upon analyzing stocks within the Russell 3000 index, whose members represent about 98% of the combined market capitalization of the entire U.S. equity market. I measured the correlation between each stock’s ESG rating as calculated by Refinitiv and its weighted average cost of capital (WACC). A firm’s WACC represents what it pays to finance its operations via both debt and equity sources; it is weighted by the contribution each source makes to a firm’s overall financing.