Environmental, social and corporate governance (ESG) factors can have a positive impact on portfolio returns, according to a growing body of academic research. In a new report, "Shedding Light on Responsible Investment: Approaches, Returns and Impacts", investment consultants Mercer summarise and comment on sixteen academic studies, the majority of which (ten) show a positive relationship between ESG factors and companies’ financial performance, four of which show a neutral relationship and two which show a neutral to negative relationship.

The research reviews influential, peer-reviewed studies which apply traditional finance theory to ESG factors and span a variety of research methods, regional samples and investment approaches (such as screening, integration, and shareholder engagement). The studies also encompass a variety of geographies, both in country of origin and in markets considered.

“The idea that responsible investment does not have to come at a cost to performance is becoming well established in the institutional investment industry. In fact, the ‘Shedding Light’ report further builds the already strong case that considering ESG factors can add real and measurable value to an investment portfolio,” said Tim Gardener, global chief investment officer for Mercer’s investment consulting business.

”Shedding Light” is a follow up to Mercer's 2007 report Demystifying Responsible Investment Performance in which Mercer and the Asset Management Working Group of the United Nations Environment Program Finance Initiative (UNEP FI) studied the existing academic ESG performance research. Combining the two reports, a total of thirty-six studies examining the link between ESG factors and financial performance have been reviewed. Of these, twenty show evidence of a positive relationship between ESG factors and financial performance; only three show evidence of a fully negative relationship.

Summary of academic research on link between ESG factors and financial performance

2009
Mercer
Study

2007
Mercer/
UNEP FI
Study

Total

Studies showing positive impact

10

10

20

Studies showing neutral to positive impact

0

2

2

Studies showing neutral impact

4

4

8

Studies showing neutral to negative impact

2

1

3

Studies showing negative impact

0

3

3

The results vary in part due to differing research methods and short sample periods. In the past, ESG studies tended to focus on the link between ESG factors and listed equities. This exclusive focus on equities is beginning to change, and Mercer’s new report includes several studies examining the financial performance of other types of investments, such as microfinance funds and hedge funds.

Another key to the interpretation of the results is an understanding that responsible investment is a broad practice and that there are a number of tools available for integrating ESG factors into the investment process including voting, engagement, collaboration, negative and positive screening (sometimes referred to as best in class) and ESG integration into valuation metrics.

“Growing interest in responsible investment due to regulatory changes, further reassurance about the link between ESG factors and fiduciary duty and increased public awareness, has led to greater mainstream adoption of these tools worldwide,” noted Jane Ambachtsheer, Mercer’s global head of responsible investment. “As these trends strengthen, we can expect to see continued improvement in the area of ESG integration by institutional investors and increased academic and industry focus on its impact on performance.”