Is there evidence linking ESG with improved financial performance?

The short answer? Yes! Michelle Winters spends a few minutes explaining the correlation between ESG and increased revenue and provides some proven examples.

Video transcript:

Hi everyone, Michelle Winters here from Goby, and today I'm going to dive into the question that comes up often: "Is there actual financial performance returns with ESG?"

And while there are quite a few positive alignments and correlations out there that say yes, I'm going to try and drop in a few specifics to make the case.

Honestly, probably one of the most prevalent, for better or for worse, has been 2020. It's a very significant example of the benefits of ESG and its impact on financial returns. When you think about the multitudes of crisis's that we've seen, we've experienced, with the fires of Australia, the COVID pandemic, the increased focus on social injustice that just understood that the nonfinancial ESG factors can have a long-term impact.

So actually, to start some of the quotes here, but State Street said it best, I think, in their white paper from earlier this year, "the pandemic has led to a more complete application of ESG."

That is that while the "E" has been more readily understood and acted upon, the pandemic has really pulled forward the "S" and the "G" and shown those attributes in a sharper focus. Factors such as company contingency planning and work environment, as well as how they treat their customers and their communities are now top of mind for many of investors.

But let's dive into a few other statistics: does ESG actually lead to the better numbers?

Well, when one from S&P Global Market showed that the performance of 17 ESG ETFs and mutual funds with more than 250 million in AUM found that the year-to-date period through May of 2020, showed 83% of them outperformed the S&P 500.

Another in 2018, so this is a couple years ago: Bank of America Merrill Lynch found that firms with a better ESG record than their peers produced higher three-year returns, were more likely to become high quality stocks, were less likely to have large price declines, and were less likely to go bankrupt.

Another, according to a 2018 European socially responsible investments study on ESG integration into investment decisions, looking specifically at about 260 asset managers and asset owners in Europe, led to a compound annual growth rate of 27% compared to 2015.

And then lastly, there was another really in-depth case study I found that looked at over 1,000 public companies and applied this combined analysis, machine learning, and logical regression models, and basically, at the end of the day, the founding was, you know, as we expected, that suggested both returns on equities and returns on assets performed better than the baseline without.

So ultimately, at the end of the day, all this literature agrees that a company's commitment to ESG reduces uncertainty and risk, it publicly increases its reputation among investors, and it also suggests that ESG integration may provide some downside protection.

So when markets are struggling, we're in a global pandemic, it really helps the ESG potential role as a long-term investment strategy.

Something else that I found that was really great was the comments from Morgan Stanley earlier in this year in their study that suggested an estimated $30 trillion dollars in wealth is going to be inherited by millennial investors in the coming years. And they're a group that is nearly twice as likely to invest in companies and funds that meet their environmental and social values. So it's something to really be thinking about as we look to, you know, future investor population.

But I'm going to take a second here and really break down where this value creation link is. And we can summarize it, I think, in a few key variables.

So one: ESG leads to top line growth, attracting more businesses and investors.

Two is cost reduction, so potential lower waste, better preparedness for product resourcing, and supply chain, etc, really reducing also there any type of reputational risk which could lead to costs that could be incurred.

Three is better preparedness for the regulatory and legal interventions that are not going away.

Four is a productivity uplift, so attracting talent, reducing turnover, better motivation within your employees.

And then last but not least, is just the overall investment and asset optimization.

So those enhanced returns all in all, while it may be difficult for some to see or believe the impact of ESG on that bottom line, the evidence is there and it's growing.

So thanks for spending a few minutes with me. I'm always happy to dive in further and give more information on this research. But I really enjoyed diving into those specifics and I'm looking forward to what 2021 will continue to bring. Thanks!