Has ESG Investing Changed Corporate Behavior?

Assets have flowed mightily into environmental, social and governance (ESG) funds, and new research shows that many corporations have changed their behavior, with benefits accruing to society at large.

In our book, Your Essential Guide to Sustainable Investing, Sam Adams and I provided the evidence demonstrating that:

  • Improvement in environmental, social and governance (ESG) scores (ESG momentum) has resulted in improved valuation (lower costs of capital: higher P/E ratios and lower interest costs) – providing companies with an incentive to improve their scores.
  • Companies with high ESG scores have had better risk management and better compliance standards, leading to fewer extreme events such as environmental disasters, fraud, corruption and litigation – they have had less tail risk.
  • Firm engagement in ESG has instilled a sense of purpose to employees, which has motivated them, and motivated employees are more productive, enhancing firm value. Firms with high ESG ratings and high ratings on employee satisfaction have significantly outperformed – they have tended to be more profitable.