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.
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
Our findings reveal that while strong ESG scores do not compensate for weak fundamentals, “triple outperformers”—companies that achieve stronger growth and profitability than their peers while improving sustainability and ESG scores—deliver two percentage points greater annual excess TSR than companies that excel only ...
Do companies with high ESG rating outperform? ›
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? ›
10 best ESG stocks right now
| Rank | Name and Ticker | Industry |
|---|
| 1 | Nvidia (NASDAQ:NVDA) | Semiconductors |
| 2 | Microsoft (NASDAQ:MSFT) | Software and infrastructure |
| 3 | Best Buy (NYSE:BBY) | Specialty retail |
| 4 | Adobe (NASDAQ:ADBE) | Software and infrastructure |
6 more rowsFeb 1, 2024
As we've seen, there are plenty of ESG benefits to consider. From enhanced portfolio performance and improved risk management to fostering innovation and making a positive impact on global challenges, ESG is the key to long-term profitability and a positive reputation for your brand.
What are the downsides of ESG? ›
However, there are also some cons to ESG investing. First, ESG funds may carry higher-than-average expense ratios. This is because ESG investing requires more research and due diligence, which can be costly. Second, ESG investing can be subjective.
Why is ESG criticized? ›
One of the biggest criticisms of ESG is that it perpetuates what it was partly designed to stop – greenwashing.
What are the flaws of ESG ratings? ›
Merited criticisms of ESG highlight issues such as opaque ratings methodologies, conflicts of interest and the need for greater transparency for ESG rating providers. Without additional data points, aggregated ESG ratings are questionable.
Are ESG stocks really outperforming? ›
A study from The Journal of Finance found that out of a pool of 20,000 mutual funds with $8 trillion in assets, those rated highly for ESG factors did not outperform those rated poorly. There are many possible reasons for this.
Are 90% of companies developing an ESG strategy? ›
In 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.
Which company has been a leader in ESG? ›
Top 100 ESG Companies
| Rank | Company | Sector |
|---|
| 1 | ASML Holdings N.V. | Electronic Technology |
| 2 | Check Point Software Technologies | Technology Services |
| 3 | Hermes International SCA | Consumer Non-Durables |
| 4 | Linde | Process Industries |
39 more rowsESG 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 rowESG Risk Score for Peers
| Name | Total ESG Risk score | G |
|---|
| FUJIF FUJIFILM HOLDINGS CORPORATION | 17 | 7 |
| ANET Arista Networks, Inc. | 17 | 7 |
| AAPL Apple Inc. | 17 | 9 |
| GLW Corning Incorporated | 16 | 6 |
1 more rowIn reviewing over 1,000 studies published between 2015 – 2020, we found a positive relationship between ESG and financial performance for 58% of the “corporate” studies focused on operational metric such as ROE, ROA, or stock price with 13% showing neutral impact, 21% mixed results (the same study finding a positive, ...
Who created ESG? ›
It refers to a set of metrics used to measure an organization's environmental and social impact and has become increasingly important in investment decision-making over the years. But while the term ESG was first coined in 2004 by the United Nations Global Compact, the concept has been around for much longer.
Who benefits from ESG? ›
ESG programs help businesses attract investors, build customer loyalty, improve financial performance, make operations sustainable and gain a competitive edge.
Are ESG funds performing well? ›
ESG Fund Returns Recover, but Still Trail Conventional Peers by a Small Margin. The tech stocks that helped ESG funds and the utilities that hurt them in 2023. Sustainable funds performed much better in 2023 compared with 2022, but results were mixed across asset classes.
Do ESG stocks outperform the market? ›
ESG equity indices have performed in line with, or in some cases outperformed, traditional indices. Companies with higher ESG ratings tend to be more competitive and have high quality management teams, driving strong returns.
Are ESG investors underperforming? ›
Funds that invest using environmental, social, and governance, or ESG, criteria underperformed for a second consecutive year. According to data from Morningstar Direct, sustainable U.S. equity funds were up an average 21.6%, including dividends, through Dec.
Does ESG improve profitability? ›
Many academic studies and observations from market practice suggest a positive relationship between ESG and firm value and profitability. However, there are also quite a number of negative and mixed results in previous research.
