Companies with stronger ESG standards usually perform better financially, according to recent research.
A recent report by Axioma, provider of enterprise market risk and portfolio analytics solutions, found that companies with better environmental, social, and corporate governance (ESG) standards “…often outperform the market” and exceed their financial benchmarks. The report also found that investment portfolios with high-scoring ESG companies outperformed their benchmarks by between 81 to 243 basis points over a four-year period (between 2014-2018).
Previous Boston Consulting Group research has also found that companies with higher ESG standards (e.g., companies seeking to conserve water) are more profitable than their counterparts. Furthermore, that investing in companies with high standards can help mitigate exposure to potential liabilities and costs that can arise out of ESG issues.
Deriving reliable statistics about companies’ ESG performance is difficult. Such statistics and underlying information can alter rapidly, and there are some health warnings attached to studies that treat data in a uniform manner because they fail to account for the material increase in marketing and regulation that ESG companies are subject to.
Nevertheless, there is growing evidence to suggest that companies with poor governance or less environmentally conscious policies do not fare as well financially as their counterparts with better ESG standards. Thus, companies should be alive to the potential benefits and options for addressing increased ESG standards.
This blog was prepared with the assistance of Olivia Featherstone in the London office of Latham & Watkins.