Sustainability initiatives drives better financial performance due to improved risk management and more innovation

The NYU Stern Center for Sustainable Business, partnering with Rockefeller Asset Management, has announced the findings of a meta-study examining the relationship between environmental, social and corporate governance (ESG) activities at organisations and their financial performance in 1,141 peer-reviewed research papers over the last five years.

Crucially, the study found that sustainability initiatives at corporations appear to drive better financial performance due to mediating factors, such as improved risk management and more innovation. It also found that ESG investing provides downside protection, especially during a social or economic crisis.

Other key takeaways include:

  1. Improved financial performance due to ESG becomes more noticeable over longer time horizons.
  2. ESG integration as an investment strategy performs better than negative screening approaches. 
  3. Managing for a low-carbon future improves financial performance.
  4. ESG disclosure without an accompanying strategy does not drive financial performance.

Dividing articles into those focused on corporate financial performance and those focused on investment performance, the researchers found a positive relationship between ESG and financial performance in 58% of the corporate studies focused on operational metrics or stock price with 13% showing neutral impact, 21% mixed results and only 8% showing a negative relationship.

For investment studies, typically focused on risk-adjusted attributes, 59% showed similar or better performance relative to conventional investment approaches while only 14% found negative results.

“We’ve seen an exponential increase in ESG and impact investing as evidence builds that business strategy focused on material ESG issues goes hand-in-hand with high-quality management teams and improved returns,” noted Professor Tensie Whelan, founding director of NYU Stern’s Center for Sustainable Business. “We are hopeful that the findings from our research will help individual investors and companies alike understand that sustainable business is good business.”

“Our analysis demonstrates the benefits of incorporating ESG information into an investment process for long-term investors managing through varying economic cycles toward a low-carbon future. This has been a valuable and insightful collaboration with NYU Stern’s Center for Sustainable Business,” added NYU Stern alumnus Casey Clark (MBA ’17), CFA, managing director, global head of ESG Investments & Portfolio Manager at Rockefeller Asset Management.

“I believe that research in the years ahead will increasingly focus on the risk and return relationship between ESG leaders, ESG improvers and thematic strategies. That is the future of sustainable investing.” 

“This research is especially timely in light of the SEC under President Biden pushing for disclosure of ESG and climate change risk,” added Ulrich Atz, research fellow at the NYU Stern Center for Sustainable Business.