Environmental, social and corporate governance practices can help boost the return on corporate investments in some circumstances, according to an analysis of academic research from consultancy Mercer.
The report, Shedding light on responsible investment: Approaches, returns and impacts, released Nov. 17, 2009, examines recent academic studies and incorporates findings of an earlier review of research in the burgeoning field. Of the 16 new academic studies reviewed in the new report, 10 showed evidence of a positive relationship between environmental, social and corporate governance (ESG) factors and the organization’s financial investment performance. Four reported a neutral association between these factors, and two found a negative-to-neutral impact.
Adding these studies to 20 reviewed in 2007, the report says, 20 of the total 36 studies examined to date show evidence of a positive impact of ESG factors on financial performance. Only three of the 36 show a strong negative relationship.
Manager skill, investment style and time period studied were among the factors that affect how investments will be impacted by ESG factors, the report notes.
Some research was undertaken in past years with the assumption that restricting investment based on ESG factors would limit “the investment universe” and would therefore limit returns on investments, according to the report. That assumption is being challenged by the results of the research, some of which began in the 1980s as corporations began to screen out some potential investments such as tobacco and firearms manufacturers.
Meanwhile, new regulatory standards, corporate disclosure guidelines and new signatories to the Principles for Responsible Investment (PRI) initiative are raising interest in responsible investing. The PRI initiative seeks to integrate ESG factors into the investment process and has established an academic network that is fueling some of the new research.
Additional research will help organizations understand how to approach responsible investment for maximum impact, the report says. For example, it notes that “results at the aggregate (macro) level may be misleading, as the impact of ESG factors often varies across [industry] sectors.”
However, the report continues, future research will be tricky. “There is evidence to suggest that, globally, corporations are not uniformly disclosing comprehensive information about ESG factors.”
In addition, the report states that most academic studies completed to date on ESG practices and investment return involve “listed equity investments, with little research on other asset classes. This is beginning to change, however.”
Business Ethics: The Role of Culture and Values for an Ethical Workplace, SHRM Research Quarterly, Fourth Quarter 2009