An increasing amount of evidence has revealed the financial benefits of environmental, social, and governance, or ESG, investing.
For instance, in 2019, Japan’s $1.53 trillion Government Pension Investment Fund (GPIF) revealed that its ESG portfolio outperformed the market, the Chief Investment Officer reports.
Earlier this year, the Intentional Endowments Network (IEN) found that responsible investing strategies from university endowments did as well or even better than traditional investments.
Additionally, research out of BlackRock and Bank of America discovered that ESG investments outperformed non-sustainable counterparts over the first quarter and through the height of the coronavirus market plunge.
Through the various research and studies, Harvard Business School professor George Serafeim found that ESG not only outperforms over the long term, ESG investments also holds up better during market downturns.
Serafeim, along with Northwestern University’s Aaron Yoon and Mozaffar Khan, found companies that improved on material ESG issues “significantly outperformed” competitors. However, it should be noted that companies that outperformed on immaterial ESG issues slightly underperformed competitors.
“This suggests that investors are becoming sophisticated enough to tell the difference between greenwashing and value creation,” Serafeim wrote in the Harvard Business Review.
Serafeim argued that CEOs have to identify ESG themes that are emerging as industry drivers ahead of their competitors to stay ahead of the curb. Specifically, an ESG issue is likely to become financially material when it becomes easier for management and external stakeholders to gain insight into a company’s environmental or social impact; the media and nongovernmental organizations (NGOs) have more power, and politicians are more responsive to it; companies lack the ability to effectively self-regulate, and a company develops a differentiated service or product that replaces an unsustainable way of doing business.
“The most fundamental reason to try to raise your company’s ESG performance is that all human beings—in and out of corporate settings—have an obligation to behave in prosocial ways,” Serafeim added. “But apart from the moral case, there are very real payoffs for focusing on ESG issues.”