Companies with strong disclosure about environmental, social and governance (ESG) factors are outperforming their peers by 4%, research by academics shows.
The research shows that ESG is the key to improving business productivity, according to Cass Business School and ESG investment specialists, Alquity.
An annual return of 9.4% was gained from companies with strong disclosure, compared to a benchmark of 5.4%. In addition those with greater disclosure are five times less likely to suffer from extreme volatility.
The research consisted of an analysis of 4,400 listed companies over the period 2011-2015.
In addition, it was found that there was a marked increase in disclosure of ESG information in emerging markets. Emerging market companies have increasingly disclosed more ESG information over the last five years as a means of attracting foreign investment. Improvement in disclosure by energy companies was 25%, and for financial services companies it was 10%.
The researchers say ESG analysis is an effective tool in identifying winning stocks because companies with high and improving ESG disclosure provide better risk-adjusted returns, especially in emerging and frontier markets where political and regulatory environments are less developed.
“I urge emerging market companies, regulators, governments and investors to embrace ESG more widely in order to drive the growth of, and investment in, companies that are both responsible and financially successful,” says Paul Robinson, founder and chief executive officer of Alquity.
©2015 funds europe