Clear-cut link found between ESG disclosure and business performance
New research has found a definitive link between ESG disclosure and business performance.
The analysis by responsible investment manager Alquity and Cass Business School of over 4,400 listed companies over the period 2011-2015, has revealed that companies with strong and improving ESG disclosure in emerging markets realised an annual return of 9.4%, against the benchmark performance of 5.4%.
The research also found 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 with the greatest improvements in the Energy and Financial Services sectors (25% and 10% respectively).
The research concludes that 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 mature.
Alquity has called on the investment industry to understand the importance of ESG disclosure and noted that companies are reacting to higher levels of scrutiny from investors, regulators, commentators and the media following the global financial crisis.
Roberto Lampl, head of Latin American Investments at Alquity, said: “These results confirm Alquity’s view that greater transparency and disclosure of ESG criteria are vitally important in emerging and frontier markets where risks are greater due to less developed institutional oversight of businesses. Forward looking ESG provides investors with an indication of high quality businesses, especially when the disclosure is voluntary.
"High profile disasters like BP’s Macondo crisis in the Gulf of Mexico, the workforce crisis and shootings at Lonmin’s South African mines and more recently the problems experienced by Volkswagen all point towards an increasing scrutiny of corporate behaviour.”