All investors seek the same thing: superior risk-adjusted returns. And in recent years, the integration of environmental, social and governance information into investment decision-making and portfolio construction has become a viable route to achieving that goal. Through ESG, we see things more clearly without having to give up anything.
However, several investors are demanding more quantitative studies on the link between ESG and risk. Is there a difference in the average of the standard deviation of stock prices of companies with good ESG ratings vis-a-vis stocks with bad ESG performance? Is it possible to quantitatively demonstrate this difference, and establish that ESG firms bear less risk compared to non-ESG stocks? And, critically, since lower risk has traditionally meant lower financial returns, how can ESG investment really be a viable investment strategy?
A new study conducted by Granito & Partners in collaboration with Madrid's IE Business School has shed light on this issue. Just published by the Journal of Sustainable Finance & Investment and available on Granito's website, the study relied on the Dow Jones Sustainability index, one of the oldest and most recognized indexes in the field of ESG, to identify 157 companies that have good ESG performance. To contrast, and in order to bring statistical significance to the results, it randomly selected a greater number of companies — 809 — that are not listed on the DJSI. As the materiality of the ESG factors is highly related to the industry in which the firm operates, the study grouped equity stocks into 12 industries. The authors of the study are N.C. Ashwin Kumar, Camille Smith, Leila Badis, Nan Wang, Paz Ambrosy and Rodrigo Tavares.