We now live in a world where sustainability has entered mainstream. That much is evident from the fact that over 72% of S&P500 companies are reporting on sustainability, demonstrating a growing recognition of the strong interest expressed by investors.
This report, entitled From the Stockholder to the Stakeholder, aims to give the interested practitioner an overview of the current research on ESG.
In this enhanced meta-study we categorize more than 200 different sources. Within it, we find a remarkable correlation between diligent sustainability business practices and economic performance. The first part of the report explores this thesis from a strategic management perspective, with remarkable results: 88% of reviewed sources find that companies with robust sustainability practices demonstrate better operational performance, which ultimately translates into cashflows. The second part of the report builds on this, where 80% of the reviewed studies demonstrate that prudent sustainability practices have a positive influence on investment performance.
This report ultimately demonstrates that responsibility and profitability are not incomparable, but in fact wholly complementary. When investors and asset owners replace the question “how much return?” with “how much sustainable return?”, then they have evolved from a stockholder to a stakeholder.
Environmental, social and governance (ESG) issues are increasingly viewed as material for corporate performance. This research project seeks to identify the nature of the relationship between ESG and financial performance, the conditions under which this relationship is negative, neutral or positive, and the critical role of innovation in extending the “performance frontier.”
We investigate the effect of corporate sustainability on organizational processes and performance. Using a matched sample of 180 US companies, we find that corporations that voluntarily adopted sustainability policies by 1993 – termed as High Sustainability companies – exhibit by 2009, distinct organizational processes compared to a matched sample of firms that adopted almost none of these policies – termed as Low Sustainability companies. We find that the boards of directors of these companies are more likely to be formally responsible for sustainability and top executive compensation incentives are more likely to be a function of sustainability metrics. Moreover, High Sustainability companies are more likely to have established processes for stakeholder engagement, to be more long-term oriented, and to exhibit higher measurement and disclosure of non-financial information. Finally, we provide evidence that High Sustainability companies significantly outperform their counterparts over the long-term, both in terms of stock market as well as accounting performance.
A large body of research has documented a positive relationship between different measures of sustainability—such as indicators of employee satisfaction and effective corporate governance—and corporate financial performance. Nevertheless, many investors still struggle to quantify the value of ESG to investment performance.
To address this issue, the authors tested the effects of using different ESG filters on an investable universe that serves as the starting point for a fund manager. In this way, they attempted to determine the extent to which ESG data can add value to any investment approach, regardless of preferences towards sustainable investing.
The authors report “an unequivocally positive” contribution to risk-adjusted returns when using a 10% best-in-class ESG screening approach (one that effectively removes companies with the lowest 10% of ESG rankings), both on a global and a developed markets universe. More specifically, as a result of such screening, both the global and developed markets portfolios show higher returns, lower (tail) risk, and no significant reduction of diversification potential despite the reduction in the number of companies. Use of a 25% screening filter was also found to add value, especially by reducing tail risks, but with a larger deviation from the unscreened universe.
Overall, then, the authors’ finding is that the incorporation of ESG information contributes to better decision-making in every investment approach, with the optimal configuration depending on a fund manager’s preferences and willingness to deviate from an unscreened benchmark.
(SSRN)– Abstract: We investigate the effect of corporate sustainability on organizational processes and performance. Using a matched sample of...Read More