Companies with strong ESG perform better

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.