Many retail and institutional investors often have a pressing concern when investing: how does ESG affect financial performance?
Environmental and social accountability has increased in the past decade. There’s growing pressure on organizations to refrain from unethical practices. According to the US SIF Foundation’s Report on US Sustainable and Impact Investing Trends, one out of three dollars under professional management in the US complied with sustainability metrics. These figures show that consumers aren’t the only ones pressuring organizations to follow ethical principles. Investors are also participating in it. This added pressure is the reason behind most companies developing comprehensive ESG policies.
Reasons to Consider ESG When Investing
There often exists a misconception that ESG policies can affect a company’s financial performance. However, studies show that isn’t necessarily true. MSCI Incorporated conducted a four-year study on how businesses that fail to consider ESG metrics are affected. The study found that companies with high ESG scores have lower equity, capital, and debt costs than companies with lower ESG scores.
A study by McKinsey analysts also corroborates the results of MSCI’s study. McKinsey analysts found that organizations with better ESG scores have a ten percent lower capital cost because they have fewer regulatory, environmental, and litigation risks.
So, why consider ESG when investing? Here are some reasons:
Improved Company Performance
A years-long meta-study on over a thousand organizations shows a positive correlation between high ESG scores and financial performance. The study – conducted by researchers at NYU’s Stern Center for Sustainable Business and Rockefeller Asset Management – found a positive link between high ESG scores and financial performance in 58 percent of corporate studies. It’s worth noting that improved financial performance often doesn’t manifest in the short run. Instead, it takes longer. Experts also note that ESG integration as an investment strategy outperforms negative-screening approaches and protects investors by giving them downside protection.
Positive ESG Filtering Leads to Outperformance
Studies also show that stocks with high ESG rates generally outperform their reference portfolios in the same timeframe, particularly in the energy and consumer staples industries. Furthermore, studies also found that stocks with high ESG ratings have lower volatility than their competitors.
Strong ESG Standards Support Financial Performance in Emerging Markets
Strong ESG standards also support financial performance in emerging markets. Research reveals location can be an essential factor to consider in such instances. Emerging markets generally have lower ESG standards, allowing for larger potential gains than developed markets.
Seek Our Services to Make the Right Investment Choice
OWL ESG provides data, indexes, and evaluation metrics and tools to institutional and retail investors, helping them make informed investment choices while helping the planet. We offer an array of ERG solutions and guidance on what best meets your specific needs.
Our core offerings include principle-based screening, cover ratings, raw data sets, ESG consensus services, fund-level analyses, and more. Partner with us to get customized solutions for your ESG data, standards, and regulatory reporting needs.
We also offer SFDR data solutions and TCFD analytics services to Asset Owners, Investment Product Issuers, Corporates, Asset Managers, Fintech Platforms, and Wealth/Investment Advisors and Brokerage Firms.
