Evidence from the Eurostoxx50 concludes that companies highly rated in ESG report higher returns and lower volatility.
Not all research published on this topic supports the notion that ESG factors always lead to better stock returns. There are plenty of variables that can result in varying degrees of success, including elements as simple as time frame, and others.
An ISS study has linked ESG performance to profitability
There's a growing body of evidence to suggest that stocks of companies that meet high standards for environmental, social and governance factors (ESG) are likely to outperform the market.
Over the last five years, companies with higher ESG Ratings exhibited higher average return on invested capital, compared to companies with lower ESG ratings. They were also valued at a premium over their other top performing peers with lower ESG Ratings.
A 2015 Harvard Business School study of more than 2,300 firms found that companies that commit to and invest in strategic sustainability efforts have higher risk-adjusted stock performance, sales growth and margins.
Not only is there a general feeling that ESG strategies contribute to stronger financial performance and returns, but also that poor ESG performance or negative activity can have a detrimental effect.
In order to visualise the financial impact of an ESG strategy, there are first two important obstacles to overcome
The first; 'Measuring ESG Performance' - ESG is an area composed of so many elements, encompassing everything from parental leave and diversity policies to in-house recycling and supply chain relationships, and therefore measurement is not a simple discipline. There are a variety of metrics comprising of methods such as independent rating systems, indexing, and various ESG scores. Further research would determine a suitable method which can be applied to the specific study group.
Secondly - Measuring to what extent ESG strategies are effective in increasing ESG performance - Again this is key for helping to analysis the financial impact of ESG strategies.