Stockholm (NordSIP) – The economic argument for ESG investment is an important determinant for the integration of these factors by the financial industry and a focus of scientific research. However, the multivariate and conditional nature of financial relationships can complicate the determination and quantification of causal links. As a result, investors are often confronted with a wide range of studies providing several different and often contradictory results.
Acknowledging this type of problem, researchers often begin their inquiries with a review of the literature in their field before progressing to their specific testing of the problem at hand. An alternative solution to this problem sees researchers bypassing their own hypothesis via a meta-analysis that considers the existing body of research and whether the field has reached a consensus.
In the most recent such case, the NYU Stern Center for Sustainable Business partnered with Rockefeller Asset Management to conduct a meta-study examining the relationship between ESG activities at organizations and their financial performance. Researchers surveyed 1,141 peer-reviewed papers and 27 meta-reviews (based on ~1,400 underlying studies) published between 2015-2020*, and identified six key takeaways. According to the research improved financial performance due to ESG becomes more noticeable over longer time horizons, performs better than negative screening approaches, and provides downside protection, especially during a social or economic crisis.
The researchers found a positive relationship between ESG and financial performance in 58% of the corporate studies focused on operational metrics or stock price with 13% showing neutral impact, 21% mixed results and only 8% showing a negative relationship. For investment studies, typically focused on risk-adjusted attributes, 59% showed similar or better performance relative to conventional investment approaches while only 14% found negative results.
Morever, sustainability initiatives at corporations appear to drive better financial performance due to mediating factors such as improved risk management and more innovation, although ESG disclosure without an accompanying strategy does not drive financial performance.
“Our analysis demonstrates the benefits of incorporating ESG information into an investment process for long-term investors managing through varying economic cycles toward a low-carbon future. This has been a valuable and insightful collaboration with NYU Stern’s Center for Sustainable Business,” adds NYU Stern alumnus Casey Clark (MBA ’17), CFA, Managing Director, Global Head of ESG Investments & Portfolio Manager at Rockefeller Asset Management. “I believe that research in the years ahead will increasingly focus on the risk and return relationship between ESG leaders, ESG improvers and thematic strategies. That is the future of sustainable investing.”
“This research is especially timely in light of the SEC under President Biden pushing for disclosure of ESG and climate change risk,” explains Ulrich Atz, Research Fellow at the NYU Stern Center for Sustainable Business. “Our findings can serve as a key resource for the SEC’s new chairperson as s/he shapes future regulations.”
“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,” notes Professor Tensie Whelan, Founding Director of NYU Stern’s Center for Sustainable Business. “With Rockefeller Asset Management’s generous support, we were able to complete the first large-scale analysis on these critical topics in nearly five years. We are hopeful that the findings from our research will help individual investors and companies alike understand that sustainable business is good business.”
*Select papers are available through the Center’s new ROSI™ Research Database