November 18, 2009
Studies Find Positive Link Between ESG Integration and Investment Performance
by Robert Kropp
Mercer's second review of academic research into ESG factors again finds that most studies report a
positive correlation with financial performance.
In a follow-up to a 2007 review, Mercer has
assessed the state of the field of academic research into environmental, social, and corporate
governance (ESG) factors, again finding that consideration of ESG factors can lead to positive
The new report, entitled Shedding light on responsible investment: Approaches, returns and
impacts, assesses 16 academic studies, and in ten cases finds a positive correlation between
consideration of ESG factors and financial performance. Only two studies found a neutral-negative
impact, while the remaining four found the impact of such considerations to be neutral.
The 2007 review assessed 20 academic studies on the issue, and also found that 10 of the
studies reported a positive correlation, while seven reported a neutral effect and three a negative
association. That report, entitled Demystifying Responsible Investment Performance , was prepared by Mercer and the Asset Management Working
Group (AMWG) of the UNEP Finance Initiative
In the November, 2009, review, Mercer reported that "A variety of factors,
such as manager skill, investment style and time period, is integral to how ESG factors translate
into investment performance."
Mercer found that the impact of ESG factors often varies
significantly across industrial sectors, and recommends that research into those factors be
conducted at disaggregated levels. Mercer also found evidence that companies are not uniformly
disclosing comprehensive information about ESG factors, leading to reliance upon specialist ESG
research services for many of the academic studies.
Overall, the studies revealed that
consideration of social and corporate governance factors can lead to positive financial
performance. The studies of environmental factors found that their materiality varies across
industries, underscoring Mercer's recommendation that research be disaggregated.
studies of negative screening techniques have generally concluded that the practice can add value
to portfolios. However, according to Mercer, "results are leaning in favor of the value-added
proposition of ESG integration."
While most of the studies undertaken thus far have
focused on listed equity investments, Mercer found evidence that research is beginning to include
other asset classes, and studies of microfinance were included in its report. Mercer also noted
that forthcoming research papers will focus on such classes as fixed income and real estate.
SRI World Group, Inc. All Rights Reserved.