Companies with higher ESG ratings see stronger investment returns

Kroll study finds globally 'ESG leaders' return 12.9% compared with 8.6% returned by laggards

Globally, ESG ‘leaders’, as rated by MSCI, are providing higher returns than ESG ‘laggards’, a study conducted by global risk and financial advisory solutions provider Kroll has found.

These companies returned an average of 12.9%, compared with an average 8.6% annual return from laggard companies. This represents an approximately 50% premium in terms of relative performance by top-rated ESG companies.

The ESG and Global Investor Returns Study examined the relationship between historical returns of publicly traded companies and their ESG ratings globally, analyzing data on more than 13,000 companies across a variety of industries.

In the UK, ESG ‘leader’ companies had an average annual return of 6%, in contrast with the negative performance (-2.5%) by ESG ‘laggards’.

“The strong UK figures reflect the country’s withstanding commitments to ESG initiatives and regulations. However, the future of ESG and sustainability investing will depend on investor confidence in the reliability of ESG ratings and ESG disclosures and their relevance as an indicator of public company performance,” stated Carla Nunes, managing director and global leader of the valuation digital services group at Kroll.

“Quantitative analysis of the relationship between ESG ratings and equity returns is a critical component for evaluating ESG-based investment decisions. Increased regulation around ESG ratings is likely to bring some uniformity to the field.”

When compared to other regions, Europe’s figures stood out as particularly strong, with nearly a third of companies being rated as leaders as of December 2021. By comparison, just 10% of North American and 6% of Asia companies achieved leader ratings, while both regions also has a higher proportion of laggards, at 17% and 38% respectively.

In addition, the study revealed that European ESG leaders earned an average annual return of 10%, compared to an average of 7% for laggard companies.

“The strength of these results for the UK and Europe can be underpinned by the region’s long-standing commitment to ESG and sustainability issues,” added Nunes.

“It comes as no surprise that Europe is at the forefront, and with significant legislation like the EU Sustainable Finance Disclosure Regulation coming into force earlier in the year, and the just-approved European Sustainability Reporting Standards, we can expect this trend to continue.”