Meta-study underlines ties between ESG and corporate success

A new meta-study looking at a wide array of research from the past five years underlines the links between ESG and positive outcomes for companies and investors.

Researchers from the NYU Stern Center for Sustainable Business and Rockefeller Asset Management looked at 1,141 peer-reviewed papers and 27 meta-reviews – themselves based on roughly 1,400 studies – published between 2015 and 2020. They split underlying papers into two groups: those focused on corporate financial performance such as return on equity, and those focused on investment performance using measures such as alpha.

The meta-study finds a positive link between ESG and financial performance in 58 percent of the corporate studies, with 13 percent showing a neutral impact, 21 percent mixed results and only 8 percent showing a negative relationship. Among investment studies, 59 percent find similar or better performance relative to conventional investment approaches while only 14 percent show negative results.

The links are even more significant when looking at studies focusing on climate change as part of ESG: 86 percent of corporate studies and 65 percent of investment studies see positive or neutral relationships.

Ulrich Atz, research fellow at the NYU Stern Center for Sustainable Business, notes that with individual studies it is easy to cherry-pick certain results but that with a meta-study it is possible to look at common threads. He tells Corporate Secretary that a key lesson for investors from the new research is that taking a long-term perspective does not lead to a trade-off in the short term with conventional returns. He adds that, for companies, an important takeaway is the critical role ESG disclosures play, and the need for them to be smart.

The researchers draw six key lessons from their work on the meta-study:

1.       Improved financial performance due to ESG becomes more noticeable over longer time periods

2.       ESG integration as an investment strategy performs better than negative-screening approaches

3.       ESG investing provides downside protection, particularly during a social or economic crisis

4.       Companies’ sustainability initiatives appear to drive better financial performance due to factors such as improved risk management and more innovation

5.       Managing for a low-carbon future improves financial performance

6.       ESG disclosure without an accompanying strategy does not drive financial performance.

‘We’ve seen an exponential increase in ESG and impact investing as evidence builds that business strategy focused on material ESG issues goes hand-in-hand with high-quality management teams and improved returns,’ Professor Tensie Whelan, founding director of NYU Stern’s Center for Sustainable Business and one of the report’s authors, says in a statement.

In seeking an explanation for the link between ESG and financial performance, many of the underlying studies point to social science models, the authors note. The most commonly cited is stakeholder theory, which has become a topic of greater discussion recently, particularly following the release by the Business Roundtable in August 2019 of its Statement on Corporate Purpose. Shared value, legitimacy theory and the resource-based view appear in a significant number of studies.

‘Notably, those studies that did not include a social science theory only found a one-in-three positive association with ESG and financial performance, whereas the odds were one-in-two on average for research grounded in social science theories,’ the authors of the new meta-study write. ‘This finding points toward the need to better understand the mechanisms behind the relationship between ESG and financial performance.’

The authors also argue that future studies need to draw better distinctions between different types of investment strategies and asset classes in order to analyze financial performance. ‘Thematic studies on material issues such as climate change provide an intriguing approach, as focusing on one issue may lead to more conclusive results,’ they add.