Companies with higher ESG ratings generally experienced better investment returns than those with lower ratings, according to a study by global risk and financial advisory provider Kroll.
The comprehensive ‘ESG and Global Investor Returns Study‘ spanned across 13,000 companies worldwide. Within the UK landscape, it was observed that 41% of companies which were classified as ESG “Leaders” by the MSCI standards reported an average annual return of 6% in US$ terms.
On the other hand, companies identified as ESG “Laggards” registered a contrasting average return of -2.5%.
Moreover, as of December 2021, approximately one-third of Western European companies achieved the status of ESG “Leaders”.
On a more expansive scale, companies globally recognised as “Leaders” registered a 12.9% average annual return, while “Laggards” trailed at 8.6%.
Carla Nunes, managing director and global leader of the valuation digital services group, Kroll, said, “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.
“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,” added Nunes.
The findings not only highlight the possible correlation between ESG ratings and investment outcomes but also underscore the growing importance of ESG considerations in the global investment landscape, explained Kroll. Additionally, it said the study further illuminates the criticality of precise data collection, reporting and the consequent influence of ESG ratings on informed investment decision-making processes.
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