For investors focused on profit, investing in environmentally friendly firms may not seem like the most lucrative strategy. They may worry that adopting greener practices could hurt a company’s share price.

But in a new paper, Kellogg researchers argue just the opposite. Paying attention to firms’ sustainability—captured in metrics called environmental, social, and governance (ESG) criteria—can actually improve the share price, the paper concludes. Green companies may not be raking in the cash now, but they are more likely to outlast sudden industry shake-ups, such as new pollution regulations or consumer-driven demand for eco-friendly products.

The research builds on previous work suggesting that well-governed firms—those that score high on the governance part of ESG ratings—perform better.

For investors, paying attention to environment-related risks is particularly important in the age of social media, the authors say. Today’s consumers can communicate and mobilize much faster—for instance, to shame a company for its unsustainable practices. Because of this heightened awareness, Jagannathan predicts that new environmental regulations will follow public protest more quickly than in the past.


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