ESG and performance

This is supported by several academic studies, which show evidence of boosting investment returns when incorporating ESG factors. Successful engagement and companies managing ESG risks can have a positive effect on performance. Factors like changing regulation, companies making sustainability pledges and consumer behaviour (especially in younger generations) add to a healthy long-term investment case for sustainability.

ESG investing can also create value for investors beyond investment performance as they can align their own values and beliefs with their investments.

Socially Responsible Investments (SRI) have outperformed the broader market

Even though 2022 proved to be tough for investors with a sustainable or ESG focus the long term picture still looks strong. The MSCI World Socially Responsible Investment (SRI) Index has outperformed its non SRI equivalent MSCI World by 15.7% over 6 years cumulatively, and by 2.5% on an annualised basis. This is with comparable volatilities.

Source: Morningstar Direct as of 28/03/2023.
Past performance is not a guarantee of future performance.

Academic research

“Academic research links sustainability with financial outperformance”

A lot of independent scientific research has been done on the financial merits of incorporating ESG factors into the investment process. The general conclusion being that it adds value. The university of Oxford did an aggregated meta study on 200 other individual studies on sustainability and corporate performance and found the following ⁽¹⁾ : Of the reviewed sources…
I. 90% concluded that good ESG standards lowers cost of capital
II. 88% showed that good ESG practices results in better operational performance; and
III. 80% showed that stock price performance is positively correlated with good sustainability practices.

Successful engagement

“Successful engagement with companies can boost outperformance of the stock”

We consider active ownership as one of our most important and powerful tool to promote environmental and social characteristics. We engage investee companies collectively with other shareholders regarding subjects like climate change risks, sustainable reporting and strategy and corporate culture. A study published in the Journal of Business Ethics showed that targeted firms in the lowest ex ante ESG quartile outperform matched peers by 7.5% in the year after the end of the engagement ⁽²⁾.

Companies which manage ESG risk well

“Companies which manage ESG risks well are correlated to being quality companies”

Management awareness of the societal impact of a company is considered as a sign of quality. Having a strong societal profile improves the reputation of a company, making it more attractive to both clients and staff. A study by NYU Stern Center for Sustainable Business and Rockefeller Asset Management ⁽³⁾ showed that sustainability initiatives at corporations appear to drive better financial performance due to mediating factors such as improved risk management and more innovation.
Companies that pay enough attention to sustainability are also less likely to be involved in scandals that could lead to large fines (such as with BP and Volkswagen in the past).

Regulation and government subsidies

“Regulation and government subsidies are driving asset flows”

Stricter regulations can also offer a competitive advantage to companies that were already paying more attention to sustainability as they will face less challenges or costs to meet the new rules. But rules and regulations aren’t the only way that governments are stimulating more sustainable awareness and behavior. Both in Europe (Green Deal) and in the US (Biden’s Inflation Reduction Act) are large stimulus packages in place to promote the energy transition and clean transportation.

The biggest companies in the world

“The biggest companies in the world have made net zero carbon emission pledges”

But it is not just consumers who are changing their behaviour. Companies are also increasingly changing their behaviour. A large number of the biggest companies in the world have already pledged to become net zero carbon emitters by 2030, 2040 or 2050. Surprisingly even major oil producing companies are among these. In order to achieve this these companies have to become more energy efficient and/or switch to clean energy sources.

“Younger generations have a stronger focus on sustainability”

The trend towards more sustainability is also visible in consumer behaviour. Especially younger generations have a stronger focus on sustainability and are adapting their consumption and purchasing behaviour accordingly. According to a recent study ⁽⁴⁾, the majority of Gen Z shoppers (born between 1997 and 2012) demand sustainable retail and most are willing to spend 10% more on sustainable products.

All these factors combined create a strong and structural tail wind for companies that have a strong ESG profile. Companies that are not paying enough attention to sustainability on the other side will increasingly face risks both from a legal point of view and from a competitive standpoint. Asset owners around the world will want to reflect the preferences of their clients and drive asset flows.

Clark, Gordon L. et al, From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance (March 5, 2015). Available at https://ssrn.com/abstract=2508281 or http://dx.doi.org/10.2139/ssrn.2508281
Barko, Tamas et al, Shareholder Engagement on Environmental, Social, and Governance Performance. Journal of Business Ethics, 2022, 180, pp. 777–812, CentER Discussion Paper Series No. 2017-040, European Corporate Governance Institute (ECGI) - Finance Working Paper Available at https://ssrn.com/abstract=2977219
Whelan, Atz, Van Holt and Clark. ESG and Financial performance: Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015 – 2020. Available at: https://www.stern.nyu.edu/sites/default/files/assets/documents/NYU-RAM_ESG-Paper_2021.pdf
Versace, Abssy: World Reimagined, How Millennials and Gen Z Are Driving Growth Behind ESG. Available at Nasdaq.com 23-09-2023

Authors:

AJ Singh Head of ESG & Sustainable Investing
Bas Gradussen Sustainable Investment Strategist
Giang Vu Sustainable Investment Strategist
Martynas Rudavicius Sustainable Investment Strategist

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Information correct as of 29 April 2024.

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