‘Stronger investment returns for companies with high ESG ratings’

New Kroll study shows stronger investment returns for companies with high ESG ratings, with UK firms leading the way with number of ESG “Leaders”

• Globally, ESG “Leaders” had annual returns of 12.9% vs. 8.6% for ESG “Laggards” 
• In the UK, ESG “Leaders” returned an average of 6% vs. -2.5% for ESG “Laggards” 
• Across the continent, nearly a third of Western European companies led on sustainability issues – only 7% were considered “Laggards” 

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. Kroll analysed data on over 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. 

In the UK, the study found that 41% of companies analysed are considered ESG “Leaders” (as rated by MSCI), earning an average annual return of 6% (in US$ terms). This is in stark contrast with the negative performance (-2.5%) by ESG “Laggards”. These figures are a reflection of the proactive stance of both UK and European business when it comes to advancing ESG practices and regulations. 

When compared to other regions, Europe’s figures stood out as particularly strong, with nearly a third of companies being rated as Leaders (as of December 2021). By comparison, just 10% of North American and 6% of Asian companies achieved Leader ratings.

These geographies also had a higher proportion of Laggards at 17% in North America and 38% in Asia. In addition, the study revealed that European ESG Leaders earned an average annual return of 10.0%, compared to an average of 7.0% for Laggard companies.

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. 

“The strong UK figures reflect the country’s withstanding commitments to ESG initiatives and regulations. However, 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.  

“The strength of these results for the UK and Europe can be underpinned by the region’s long-standing commitment to ESG and sustainability issues. It comes as no surprise that Europe is at the forefront, and with significant legislation like the EU Sustainable Finance Disclosure Regulation (SFDR) coming into force earlier in the year, and the just-approved European Sustainability Reporting Standards (ESRS), we can expect this trend to continue,” Nunes added. 

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 Special Administrative Region of the People’s Republic of China (Hong Kong SAR), India, Japan, South Korea, the United Kingdom (UK) and the U.S.) and 11 industries.