Companies with higher environment, social and governance ratings generated better investment returns than those with lower ratings, according to the ESG and Global Investor Returns Study by global risk and financial advisory provider Kroll.
The study, which canvassed 13,000 companies worldwide, focused on the relationship between a company’s total stock returns—dividends plus capital appreciation—and the ESG rating issued by MSCI Inc.over the 2013-2021 period.
Globally, so-called ESG leaders reported an average annual return of 12.9% in the nine-year period, compared with 8.6% for so-called laggard companies.
European companies stood out as particularly strong, with nearly a third being rated as leaders as of December 2021.
In the UK, 41% of companies were considered ESG leaders, earning an average annual return of 6% in US dollar terms, while the laggards registered a -2.5%.
By comparison, just 6% of Asian companies achieved leader status with 38% falling into the laggard category.
In the US, which has the largest number of rated companies, the ESG leaders had an average annual return of 20.3%, compared with 13.9% for laggard companies.
However, looking more closely, the study showed that US laggards in the energy, health-care and communications-services industries “significantly outperformed” their better-rated counterparts.
A major factor that skewed the numbers is the larger companies have posted bigger market gains than smaller companies for most of the past decade—and these same companies typcially also have higher ESG ratings.
The median market value of US companies with a leader rating—a category comprised of MSCI’s two best marks, AAA and AA—was more than five times the market capitalisation of US companies with a laggard rating—a category comprised of the two worst ratings, B and CCC.
“The future of ESG and sustainability investing will depend on investor confidence in the reliability of ESG ratings and ESG disclosures and their relevance as an indicator of public company performance,” said Carla Nunes, managing director and global leader of the valuation digital services group at Kroll.
She added, “Quantitative analysis of the relationship between ESG ratings and equity returns is a critical component for evaluating ESG-based investment decisions. Increased regulation around ESG ratings is likely to bring some uniformity to the field.”
The Kroll study also acknowledged the “politisation” of ESG, but it concluded that investing simply involves the consideration of “risks and opportunities” and that includes issues that may arise from various environmental, social or governance trends.
Nunes said, “While political uncertainty may impact investment decisions in the short term, the broader shift toward a greener global economy means investors will continue to be interested in ESG-focused investment opportunities as part of their asset allocation decisions.
She added, “While time will tell whether the ESG label ultimately prevails, it doesn’t really matter because the premise behind the strategy isn’t going away.”
© Markets Media Europe 2023
