ESG policies support shareholder returns

New research from Moody’s Analytics helps identify how companies with stronger ESG performance produce better shareholder returns.

The firm reported that a pair of research studies revealed that companies that seek to address ESG risks and develop more responsible practices experience fewer ESG-related issues and, ultimately, produce higher returns.

“We found that there is a meaningful benefit to a responsible ‘ESG risk management culture’ within a firm that can have a potentially material effect on equity returns,” said Doug Dwyer, managing director with Moody’s Analytics, in a release.

“ESG controversies can inflict reputational damage with significant financial and legal repercussions,” he said. “Firms that actively manage these risks do a better job of boosting shareholder value.”

Among other things, the research found that ESG events, such as environmental calamity, labour issues or governance problems, “have large and persistent negative effects on firm value.”

It also found that the greater the severity of the event, the larger its impact on shareholders.

“Moderate-to-severe ESG events resulted in an average –4% one-year excess equity return, which represents a loss of approximately US$400 million for a typical-sized firm in the study,” it said.

Additionally, Moody’s reported that a separate study found that companies can benefit from enhancing their ESG practices in response to past negative events.

Specifically, companies that improve their ESG assessments (as measured by Moody’s) experienced about 15% fewer negative ESG events in the future.

“Together, the results of these research studies show the relevance of ESG controversies to a firm’s financial performance and, importantly, that companies can influence their ESG risk management cultures, while benefiting shareholders and other stakeholders,” Dwyer said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.