CHAPTER 3

Why ESG Matters for Risk and Return

Materiality, externalities and long-term value

Opening question

“Can doing good be good for returns — or does it cost money?”

In this chapter

Externalities: costs a company imposes on others without paying for them
How externalities come back as regulation, lawsuits, lost customers and higher costs
Five channels from ESG risk to financial risk
Physical and transition climate risks, with a worked carbon-price example
Social risks and the licence to operate
Why governance is the ESG risk most clearly linked to losses
The cost of capital channel, with a worked valuation example
Lower risk, uncertain extra return: a realistic starting point, and the risks facing Vietnamese companies

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This chapter is in the full book

Chapter 1 is free to read online. The full text of chapter 3 — with its tables, figures, worked examples and practice lab — is available in the complete edition of ESG and Sustainable Investing: From Theory to Practice — Vietnam Readiness (Volume 4, NXW Investment Library).

Read Chapter 1 free Get the full book — [email protected]

Sections of this chapter

3.1 Doing good and doing well

3.2 Externalities: costs paid by others

3.3 How externalities come back

3.4 From ESG risk to financial risk

3.5 Climate risks: physical and transition

3.6 Social risks and the licence to operate

3.7 Governance as the foundation

3.8 Reputation, regulation and the cost of capital

3.9 What the investor can expect

3.10 ESG risks facing Vietnamese companies

← Chapter 2: A Short History of Responsible Investing Chapter 4: ESG Data and Disclosure →