Environmental, social and governance (ESG) factors have garnered the attention of companies and their investors and stakeholders. Amid the global crises of the pandemic and climate change, there is a special allure to business strategies that can deliver profits and societal value, especially if those results are mutually reinforcing.
Yet some studies have questioned whether integrating ESG factors into corporate decision-making necessarily leads to improved profitability. One study looking at 2,396 enterprises found that those with high ESG scores in general did not outperform the market in a statistically significant way.[1] Another study found that the average socially responsible investment fund in the US and the UK, and in certain European and Asian-Pacific countries, underperforms relative to benchmarks.[2]
However, there is more to the story. Companies which score highly in ESG factors that are material to their industry, yet poorly in immaterial factors, have been found to outperform their peers by a statistically significant percentage3. Investments in ESG often require trade-offs, and the most productive investments appear calibrated to ESG factors that are highly relevant to the business in question, such as environmental protection for a natural resources company, or customer privacy and data security factors for a technology company.
Read more about ESG and the path forward here.
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Tyson Dyck is a partner at Torys and a member of the firm’s Environmental Group, and practises extensively in the areas of Energy and Infrastructure, Mining and Metals and Climate Change.
[1] M. Khan, G. Serafeim and A. Yoon, “Corporate Sustainability: First Evidence on Materiality”, The Accounting Review (2016).
[2] L. Renneboog, J. Ter Horst and C. Zhang, “The price of ethics and stakeholder governance: The performance of socially responsible mutual funds”, Journal of Corporate Finance (2008).