Mumbai: Kroll, the leading independent provider of global risk and financial advisory solutions, today announced the launch of its ESG and Global Investor Returns Study, which examines the relationship between historical returns of publicly traded companies and their ESG ratings globally. We analyzed data on 13,000+ companies across a variety of industries around the globe and found that companies with better ESG ratings outperformed their peers with lower ratings.
“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.”
As new global regulatory and financial reporting standards are set, ESG investing will likely remain an important driver of investment decisions with management teams, investment firms, regulators and standard setters. A strong ESG materiality framework for identifying and assessing dynamic ESG factors is critical for effective reporting. Because the concept of materiality differs between ESG disclosure standards and proposals, there will be an increased need for complex data-gathering processes, which will require technology solutions and a close attention to internal controls.
Nunes added: “The demand for ESG disclosure attestation and assurance services will also increase dramatically, allowing investors to place greater reliance on ESG data for their investment decision-making.”
Key findings from the study include:
- Globally, ESG Leaders earned an average annual return of 12.9%, compared to an average 8.6% annual return earned by Laggard companies. This represents an approximately 50% premium in terms of relative performance by top-rated ESG companies.
- Similar to the findings globally, Asia companies with better (higher) ESG ratings earned a higher annual average return, when compared to portfolios of worse (lower) rated companies during the 2013−2021 period. However, when compared to other regions, Asia companies are further behind in their ESG journey. For example, in December 2021, 38% of Asia companies were rated as ESG Laggards and only 6% were considered Leaders (based on MSCI data).
- Industry performance in Asia was mixed. While better-rated companies generally outperformed lower-rated ones, that was not the case with Energy, Consumer Staples, Health Care and Utilities.
- India-based companies with better (higher) ESG ratings earned a higher annual average return, when compared to portfolios of worse (lower) rated companies during the 2013−2021 period.
- ESG Leaders in India earned an average annual return of 15.1%, which was almost double the 7.8% annual return earned by Laggard companies (in US$ terms).
- The positive relative performance of ESG Leaders vs. Laggards was generally consistent across all major geographic regions and for most industries, with some exceptions.
Aviral Jain, Managing Director, Valuation Advisory Services, India, Kroll, commented: “ESG investing is a fast-emerging concept in India, and SEBI has recently framed new rules to improve the reporting of ESG metrics for top listed companies in India. Investors have also given a thumbs-up to ESG Leader companies in India, with their average annual returns crossing 15%—this being 25% higher than the broader Indian stock market’s return of about 12% (in US$ terms). In contrast, the return for ESG Laggard companies in India was just two-thirds of the overall market return.”
Global Performance of ESG Ratings Portfolios: Cumulative Return in 2013-2021 Horizon
($1 Invested in December 2012)
Kroll noted that the need for a better understanding of the correlation between ESG ratings and investment performance was being driven by the growing volume of sustainable investments globally. In 2020, more than one-third of investment assets in developed markets was defined as “sustainable”—reaching a total of $35.3 trillion globally and $17.1 trillion in the U.S. alone, according to the Global Sustainable Investment Alliance. However, accusations of greenwashing have led to significant pushback on what is characterized as “sustainable” investing, spurring regulatory enforcement actions, increased litigation, as well as a flurry of proposed and/or finalized new standards focused on ESG and sustainability disclosures around the globe. As a result, many investment funds have changed their naming or classification and no longer label themselves as sustainability focused. This makes sustainable investing trends very difficult to compare between 2021 and 2022. In addition, according to a BCG analysis, global overall assets under management declined by 9.5%, from $108.6 trillion in 2021 to $98.3 in 2022, making comparisons even more complicated
Study Methodology
The Kroll ESG and Global Investor Returns Study examines a universe of over 13,000 companies across a variety of geographies and industries around the globe. The study examines the relationship between a company’s total stock returns (dividends plus capital appreciation) over the 2013-2021 period as compared with ESG company ratings published by MSCI to ascertain if an investment strategy focused on companies with a better rating would result in a superior return performance. This study is unique due to its comprehensive nature. It examines the relationship between company ESG ratings and returns in four geographic regions (World, North America, Western Europe and Asia), 12 countries/markets (Australia, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Japan, South Korea, the UK and the U.S.) and 11 industries.
