ESG and Financial Performance: Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015 – 2020
Meta-studies examining the relationship between ESG and financial performance have a decades-long history. Almost all the articles they cover, however, were written before 2015. Those analyses found positive correlations between ESG performance and operational efficiencies, stock performance and lower cost of capital. Five years later, we have seen an exponential growth in ESG and impact investing – due in large part to increasing evidence that business strategy focused on material ESG issues is synonymous with high quality management teams and improved returns. A case in point: A recent study looked at the initial stock market reaction to the COVID-19 crisis (up to March 23) and found that companies scoring high on a “crisis response” measure (based on Human Capital, Supply Chain, and Products and Services ESG sentiment) were associated with 1.4-2.7% higher stock returns (Cheema-Fox et al., 2020). Nevertheless, the topic continues to be debated, with some arguing that companies and investors should stick to managing for stock price and that ESG is, at best, a distraction from the real business of making money.
The authors of this report, NYU Stern Center for Sustainable Business and Rockefeller Asset Management, collaborated to examine the relationship between ESG and financial performance in more than 1,000 research papers from 2015 – 2020. Because of the varying research frameworks, metrics and definitions, we decided to take a different approach than previous meta-analyses. We divided the articles into those focused on corporate financial performance (e.g. operating metrics such as ROE or ROA or stock performance for a company or group of companies) and those focused on investment performance (from the perspective of an investor, generally measures of alpha or metrics such as the Sharpe ratio on a portfolio of stocks), to determine if there was a difference in the findings. We also separately reviewed papers and articles focused on low carbon strategies tied to financial performance in order to understand financial performance implications through the lens of a single thematic issue.
We found a positive relationship between ESG and financial performance for 58% of the “corporate” studies focused on operational metrics such as ROE, ROA, or stock price with 13% showing neutral impact, 21% mixed results (the same study finding a positive, neutral or negative results) and only 8% showing a negative relationship. For investment studies typically focused on risk-adjusted attributes such as alpha or the Sharpe ratio on a portfolio of stocks, 59% showed similar or better performance relative to conventional investment approaches while only 14% found negative results. We also found positive results when we reviewed 59 climate change, or low carbon, studies related to financial performance. On the corporate side, 57% arrived at a positive conclusion, 29% a neutral impact, 9% mixed and, 6% negative. Looking at investor studies, 65% showed positive or neutral performance compared to conventional investments with only 13% indicating negative findings. A detailed breakdown can be found in Figure 1.
These findings were supported by an additional meta-meta-analysis (a study of existing meta-studies) we undertook. We found 13 corporate meta-analysis studies published (covering 1,272 unique studies) with a quantitative approach and 2 investor meta-analysis studies (covering 107 unique studies) published since 2015. The former found consistent positive correlations between ESG and corporate financial performance; the latter found that ESG investing returns were generally indistinguishable from conventional investing returns. (Figure 2). We concluded that these two findings are robust across time and space.
For the complete version of the research paper, please download the PDF at the top of this page.