Higher ESG ratings correlate with better investment returns: Report, ET EnergyWorld


New Delhi: Companies with higher ESG (Environmental, Social, and Governance) 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 analyzed data on more than 13,000 publicly traded companies across various industries worldwide.

The numbers name

Key findings from the study revealed that ESG Leaders globally earned an average annual return of 12.9 per cent compared to an average of 8.6 per cent by companies lagging in ESG metrics. This represents about a 50 per cent premium in relative performance by companies rated higher on the ESG scale.

Asian and Indian companies in focus

Similar trends were observed in Asia, where companies with higher ESG ratings showed a stronger annual average return during 2013-2021. However, only 6 per cent of Asia companies were considered ESG Leaders as of December 2021, while 38 per cent were rated as ESG Laggards.

Indian companies followed suit. ESG Leaders in India exhibited an average annual return of 15.1 per cent, almost double the 7.8 per cent annual return for the Laggards. Aviral Jain, Managing Director, Valuation Advisory Services, India, Kroll, noted, “Investors have given a thumbs-up to ESG Leader companies in India, with their average annual returns crossing 15 per cent.”

Towards standardization

“The future of ESG and sustainability investing will depend on investor confidence in the reliability of ESG ratings and their relevance as an indicator of public company performance,” said Carla Nunes, Managing Director and Global Leader of the Valuation Digital Services Group at Kroll.

As the global financial landscape adapts to new regulatory and reporting standards, Nunes emphasized the importance of a strong ESG materiality framework for effective reporting. She added that there is an increased need for complex data-gathering processes, requiring technology solutions and attention to internal controls.

Challenges and trends

Kroll’s study comes at a time when sustainable investments globally account for more than one-third of investment assets in developed markets. However, the field has witnessed regulatory scrutiny, leading to a change in how investment funds classify themselves. According to a BCG analysis, global assets under management declined by 9.5 per cent from $108.6 trillion in 2021 to $98.3 trillion in 2022, adding to the complexity of market analysis.

  • Published On Sep 15, 2023 at 05:22 PM IST

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