Stock funds have found more success when attached to companies with good scores in environmental, social and corporate governance (ESG), it has been found.
New data from the research and sustainability data firm ESG Book has shown this trend developing over the past five years. Essentially, investments in companies with good ESG performance have generally yielded higher returns than the average within their broader market.
The results come from an analysis of model portfolios, each with between 60 and 85 stocks, excluding companies with low market capitalisations or trade volumes, ensuring no distortion of figures.
“Over a long-term horizon, regardless of region, there are benefits and better risk-return profiles,” said ESG Book’s head of ESG research and sustainable investing, Todd Bridges.
“It’s a very uniform signal that markets understand the importance of governance and have been seeing it as a value creator.”
The figures have also shown a wide variation in outperformance depending on the areas of ESG the funds are attached to (i.e. environmental, social or governance).
Governance was the winner in this regard. Any corporate recipient of funding that had good governance scores outperformed more than a company with high social scores, for example.
Geographically, Europe is the centre of this outperforming trend, the figures suggested. Between early 2017 and mid-2022, a model portfolio of regional stocks outperformed by around 1.5 percentage points.
A similar Asian-Pacific portfolio closely followed this record. The average here was around one percentage point above the benchmark.
By contrast, North America did not fare so well, coming in at just 0.17 points below the regional benchmark. However, this is far closer to the global average based on all ESG Book’s data. Europe and Asia appear to be outlying high achievers in comparison.
Adapt, build, achieve
Build a better future with the Diploma in Environmental, Social and Governance (ESG).
Adapt, build, achieve
Build a better future with the Diploma in Environmental, Social and Governance (ESG).
- University credit-rated
- World class faculty
- Flexible learning
- Global alumni network
- Best institute of the year 2024
The figures are the latest in a long line of data supporting ESG – not only as a sound investment but as a critical measure of future market success.
Proponents champion ESG for its ability to increase productivity, decrease the risk of landing in legal trouble and ensure a healthier stream of long-term profits. All of this is in addition to its importance in international politics, where lawmakers and consumers are paying more attention to sustainability, employee welfare, and civil rights issues.
Still, the concept has received its fair share of criticism – mainly for being a “fad”, a “tick-box” exercise, or the latest incarnation of “woke capitalism.”
Critically though, ESG proponents have repeatedly said that the concept is useless without proper evaluation and reporting – something that requires swathes of data and experts who can communicate it properly.
In operation for less than a year, ESG Book has said it aims to be a “disruption” in the ESG data market.
Historically, a small number of big-name firms like Bloomberg, S&P and the London Stock Exchange have guarded ESG data behind high prices. It meant that any company looking to acquire information for investors needed to set aside significant funds for that purpose.
ESG Book makes its data bank available free of charge and aims to grow that bank in future continuously. It says this will open up funding avenues for companies aligned to ESG values and make the entire system more transparent.
The organisation has received support from prominent names in international finance such as HSBC, Deutsche Bank and Swiss Re.
FAQs
Kroll analyzed data on over 13K companies across industries and found that those with better ESG ratings outperformed their peers with lower ratings; globally, ESG leaders had annual returns of 12.9% vs 8.6% for laggards.
Which companies have the best ESG score? ›
Top 100 ESG Companies
| Rank | Company | ESG Score |
|---|
| 1 | ASML Holdings N.V. | 73.13 |
| 2 | Check Point Software Technologies | 72.64 |
| 3 | Hermes International SCA | 71.71 |
| 4 | Linde | 71.26 |
39 more rowsIn today's fast-evolving business landscape, embracing the principles of environmental, social and governance (ESG) isn't just a fleeting trend. A study by Morningstar found that 90% of companies either have or are developing an ESG strategy.
What are the benefits of strong ESG performance? ›
ESG programs help businesses attract investors, build customer loyalty, improve financial performance, make operations sustainable and gain a competitive edge.
Is it better to have a high or low ESG rating? ›
Sustainalytics: Sustainalytics is a leading ESG research and analytics firm. It produces ESG scores on a scale of 0 to 100, with a higher score indicating better environmental, social, and governance performance.
Is ESG actually effective? ›
Those analyses found positive correlations between ESG performance and operational efficiencies, stock performance and lower cost of capital.
What is Tesla's ESG score? ›
ESG Risk Score for Peers
| Name | Total ESG Risk score | E |
|---|
| BAMXF Bayerische Motoren Werke AG | 25 | 5 |
| TSLA Tesla, Inc. | 25 | 3 |
| SZKMF SUZUKI MOTOR CORP | 25 | 6 |
| DAIN.MX DAIN.MX | 22 | 8 |
1 more rowPatagonia is a strong overall performer. With a 'B' rating of 74.7 for overall impact (89th percentile compared to all companies), Patagonia ranks 2nd out of 18 industry peers, behind lululemon athletica, and ahead of Nike, VF, Duluth Trading and 13 others.
What companies have successfully implemented ESG? ›
From reducing carbon emissions to promoting diversity and inclusion, ESG practices have a significant impact on the bottom line of businesses. We will explore the success of different companies in several industries- Microsoft, Accenture, Costco, Ely Lilly, and Mattel - and the positive impact of their ESG initiatives.
Why are companies against ESG? ›
“ESG investments are often opposed by conservatives who feel that ESG investments favor one political ideology and pressures companies to adopt 'woke' policies they don't support,” says Bruce.
Manufacturing is one of the industries with the greatest impact on the environment, society, and governance. Significant ESG concerns threaten its long-term viability and competitiveness.
Do ESG stocks outperform? ›
In some cases, ESG has outperformed, while in others, it has underperformed. Figuring out whether ESG stocks outperform the broader market is difficult for a few reasons. For one, there isn't a central authority that can decide whether a business follows ESG practices.
What are the disadvantages of ESG? ›
Disadvantages of ESG investing
As a result, investors may have fewer investing possibilities. There is no commonly agreed standard for establishing which companies are “ESG-compliant,” making it difficult for investors to compare and evaluate different investment possibilities.
What do financial experts say about ESG? ›
ESG considerations can help investors identify companies with strong risk management and long-term growth potential, potentially leading to positive financial returns. Why should investors care about ESG risks? ESG factors can pose financial risks to companies, such as climate change regulations or labor disputes.
Why has ESG become so popular? ›
Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty. Companies that realign to the stakeholder capitalism agenda may have a competitive advantage over those that try to return to business as usual.
Does ESG improve financial performance? ›
According to McKinsey, studies show that strong ESG performance is positively correlated with higher equity returns and reduction in downside risk.
Does ESG outperform the market? ›
The performance of ESG funds and ETFs has matched or surpassed traditional funds/ETFs over most time periods, and regulators continue to focus on climate change risks, and on improving standards and disclosures to assess and mitigate these risks.
How do ESG goals impact a company's growth performance? ›
Among other advantages, executing ESG effectively can help combat rising operating expenses (such as raw-material costs and the true cost of water or carbon), which McKinsey research has found can affect operating profits by as much as 60 percent.
How do ESG activities affect corporate performance? ›
Companies with great ESG performance typically also have strong risk management, outstanding credit quality, and high levels of financial success. Companies that improve their ESG management can not only lower their financing costs, but also boost their market value.
