ESG-Driven Companies Demonstrate Better Long-Term Performance

If a company commits to environmental, social and corporate governance principles, it’s likely to have improved financial performance.

But this strong performance becomes more noticeable over a longer-term horizon, according to a new meta-study NYU Stern Center for Sustainable Business and Rockefeller Asset Management. The study found returns of up to 3.8% higher per standard deviation of ESG score in the mid- and long-term.

In the study, NYU Stern Center and Rockefeller examined the relationship between ESG activities at organizations and their financial performance in more than 1,000 research papers over the last five years.

After reviewing 1,000 studies published between 2015 to 2020, NYU Stern and Rockefeller found a positive relationship between ESG and financial performance for 58% of the corporate studies focused on an operational metric such as ROE, ROA or stock price. Thirteen percent showed a neutral impact, while 21% demonstrated mixed results. Only 8% showed ESG hindering financial performance.

The study also found that ESG investing can provide a cushion. For instance, in the first quarter of the 2020 COVID downturn, 24 of 26 ESG index funds outperformed their conventional counterparts. They credited ESG leading to more resiliency. By the third quarter, 45% of ESG-focused funds beat their index, according to Morningstar, 2020.

Sustainability may limit downside because they provide better risk management, according to NYU Stern and Rockefeller. The study found that sustainability strategies at the corporate level can better drive financial performance through innovation, higher operational efficiency and better risk management.

More than half of the 22 studies (59%) that NYU Stern and Rockefeller reviewed found a positive correlation between operational efficiency and financial performance. Only three out of the 22 had an adverse finding. Seventeen studies had some aspect of innovation in their analysis. All of those had positive results regarding related financial performance. Fifty-two percent of the 40 studies looking at risk found a positive correlation between that and ESG performance.

NYU Stern and Rockefeller also found that managing for a low carbon future improves financial performance. In all, 59 studies were published looking at the relationship between low carbon strategies and financial performance in the last five years. The majority uncovered a positive result.

However, on its own, ESG disclosure did not drive financial performance. Only 26% of the studies that focused on disclosure alone found a positive correlation with financial performance. That compares with 53% for performance-based ESG measures.