*This particular blog post focusing on financial analysis has been split into two parts given the breadth of the topic
What: Financial analysis is the process of evaluating a company’s performance by using various analytical tools and techniques. The goal is to assess both the current and future financial health, profitability, and ability to generate cash flow. ESG. (environmental, social, governance) factors are among the most important factors in financial analysis as the provide a more comprehensive view of a company’s performance beyond financial metrics. ESG considerations allow investors and stakeholders to better assess the sustainability and long-term viability of a company’s business practices.
A few reasons why ESG is important, including but not limited to:
- Risk management: companies that over form poorly on ESG criteria may face risks such as lawsuits, fines, or reputations, damage, which can negatively impact their financial performance.
- Competitive advantage: companies that prioritize ESG factors can gain a competitive advantage by attracting customers investors, and employees who value ethical and sustainable practices.
- Long-term sustainability: companies that integrate ESG factors into their business strategy are more likely to be financially sustainable over the long-term, as they are better positioned to adapt to changing market and societal trends.
- Regulation and compliance: ESG considerations are increasingly being regulated by governments and industry associations, so companies that are proactive in addressing these issues are better positions to comply with evolving regulations.
The growth of ESG investing reflects a growing awareness of the importance of sustainability but it is also worthwhile to understand the importance of ESG by conversely looking at the future of financial analysis. This in turn would explain why ESG is important to begin with.
Why: Out of the 5 major trends and developments that are currently underway for the future of financial analysis, 2 of them include climate change and ESG integration. Climate change is important as companies will continue to face the risks related to it and regulations aimed at reducing carbon emissions. Climate change also poses risks across a range of industries from physical risks such as extreme weather events to transitional risks such as policy changes and technology shifts. ESG integration will be important as investors and stakeholders will demand a more comprehensive view of a company’s performance beyond financial metrics as mentioned above.
Overall, since the availability of ESG data is improving, with more companies providing detailed information regarding their ESG performance, financial analysis will increasingly rely on ESG data to assess companies’ long-term sustainability and profitability.
