ESG Case Studies
ESG is considered to have a significant impact on the revenue and margins of investment, especially if incorporated on a top-down approach. Case studies can get used to assist investors in understanding what an ESG integration entails and how it can be applied in fixed-income analysis and equity analysis. A good case of ESG integration is used in the Apollo hospitals to evaluate investment candidates based on the spread between the estimated cost of equity hurdle rate and return potential given a five-year holding period (Friede, Busch and Bassen, 2015). The hurdle rate considers the fundamental risk analysis, bottom-up approach, which incorporates the ESG issues of the organization. Apollo hospitals enterprises limited operates a chain of pharmacies and private hospitals in India. The brand has managed to establish itself in a country whose healthcare infrastructure is way below the recommendations set by the World Health Organization for hospital beds per person. The hospital has increased the number of beds in hospitals to meet the local demand.
The hospital has developed innovative methods to deal with demand. The hub and spoke approach is an approach used by the hospital to serve the local market and a center for telemedicine command to enable rural clinics access procedure advice and treatment from doctors in the cities (Friede et al., 2015). The hospital has also established itself through strategic positioning in the larger cities. From these, it is expected that the hospital’s profits are bound to increase with patient occupancy improvement. The company’s potential earnings and revenues are likely to grow with time, as well as an increase in reinvestment opportunities as it takes care of the medical needs of Indian citizens. The organization has also established expansion plans for smaller hospitals in smaller towns, pharmacies, and diagnostic labs to generate referrals for the hospitals and grow their revenues. Apollo hospitals have also begun using grassroots meetings with consumers to create health care awareness and better access to infrastructure through the use of smartphones. These are some of the demand drivers of new medical services that are often underappreciated. Apollo hospital has managed to grow through its adoption and integration of ESG.
Another case where ESG is used in the Godrej Group: Arisaig partners, which is a boutique investment management firm known for investing in what it considers to be emerging markets. The company has concentrated portfolios in Latin America, Africa, Asia, and global portfolios. The firm uses a buy and hold approach for that is long term and values the business through a 20-year view (Friede et al., 2015). The company acts as a partner to both its customers and its portfolio holdings. The company is focused on understanding how ESG contributes to its investment performance for its long-term investment plans. Its ESG approach is based on three pillars, which are: integrate, understand, and engage (Friede et al., 2015). The ESG feeds directly to the organization’s valuation model by incorporating a fade factor, which is an additional discount rate applied to the firm’s terminal value. The fade factor allows the company to have assessed the impacts that ESG factors have on the sustainability of the organization’s economic ditch in the long run. The approach assumes that the competitive advantage of the company will decline of time despite the strong brands of its consumer franchise and long heritage. The fade factor is low for a company that practices good ESG, sustainable moat, and stable management. For instance, brand-consumer companies have a small fade factor compared to retailers that are more prone to distraction (Friede et al., 2015). Godrej company that has partnered with Arisaig due to its long-term value has managed to create value for the business and the society through integration of ESG. These two case studies indicate that ESG investment is preferred.
Bibliography List
Friede, G., Busch, T. and Bassen, A., 2015. ESG and financial performance: aggregated evidence from more than 2000 empirical studies. Journal of Sustainable Finance & Investment, 5(4), pp.210-233.