Covid-19 was full of challenges, but along with it came some rewards. In 2020, companies scoring high on crisis preparation, an ESG factor, had 1.4-2.7% higher stock returns compared to their peers. 

That suggests that high ESG standards might go hand in hand with better corporate performance. 

ESG stands for environmental, social and corporate governance. The concept of ESG aims to capture all the non-financial risks and opportunities inherent to a company’s day to day activities. 

A recent study, led by NYU Stern Center for Sustainability Business and Rockefeller Asset Management, examined the findings of ESG in more than 1000 research papers published between 2015 and 2020. Specifically, this study divided papers into two sections: investment returns or corporate financial performance. 

While many studies have examined the impact of ESG, few have surveyed this many studies to form a more comprehensive conclusion regarding ESG. Such an approach offers a more accurate conclusion due to its data size. 

When looking at investment returns after considering ESG factors, 65% of the studies showed a positive or neutral relationship. 14% showed a negative relationship.

There has been an acceleration in ESG investing in recent years. Global sustainable investment now tops $30 trillion, a 68% increase since 2014. Starting in 2020, 1 in 3 professional managed dollars in the US use a sustainable investing strategy. More and more executives realize strong ESG commitments are important to companies’ long-term success. Consumers also have an increased attention to company’s values. 

Covid-19 put ESG to the test. A recent study concluded that 19 out of 26 ESG funds from March 2020 to March 202 performed better than the S&P 500. Those outperformers rose between 27% to 55% within a year, while S&P 500 increased 27%. The performance of ESG funds during Covid makes clear that ESG does make companies more risk resilient and competitive. 

When looking at the relationship between ESG and corporate financial performance, 58% of the studies showed a positive relationship, 8% showed a negative relationship, and the rest being mixed or neutral.

In what ways does ESG translate to better financial performance? 

Three main reasons are facilitating top-line growth, reducing costs, and increasing employee productivity.

Reason #1: Top-line growth

Stronger community and government relations can help companies expand into existing markets and tap into new markets. Corporations are awarded with access when governing authorities trust them. For example, good ESG execution has paid off in the mining sector. When considering gold, one would not think ESG can help gold miners. Yet, companies perceived to be more socially and environmentally conscious saved time in dealing with logistics seeking gold mining permission. 

Reason #2: Reducing costs 

Companies can reduce operating costs by increasing resource efficiency. For example, FedEx aims to convert 35,000 vehicles to electric or hybrid engines. They have already reduced fuel consumption by 50 million gallons per year after converting 20% of its vehicles. If companies don’t invest in resource efficiency, they will use more resources, generate unnecessary waste, and pay higher waste-disposal costs. 

Reason #3: Employee Productivity

Companies attract and retain quality employees through positive social impact and good shareholder returns, thus reducing human resources costs.  

Positive social impact correlates with higher job satisfaction. Research shows that when companies give back, employees react with enthusiasm. For example, one Australian bank offers bonuses in the form of company payments to local charities to random employees. Those who received the bonus reported greater and more immediate job satisfaction than their colleagues who were not selected for the donation program. 

Employee satisfaction is positively correlated with shareholder returns. The London Business School found that the companies that made Fortune’s “100 Best Companies to Work For” list generated 2.3 % to 3.8 % higher stock returns per year than their peers over a greater than 25-year horizon. 

Employee dissatisfaction, on the other hand, can cause strikes, worker slowdowns, and labor unions. Dealing with employee dissatisfaction acquires companies’ resources and energy, which will further slow down the productivity of the company. 

Lastly, the study made an important finding that companies which only release sustainability reports do not exhibit higher performance. Only 26% of studies found a positive relationship between releasing reports alone and improved financial performance. Sustainability report is the first step for actual strategy of implementation. It helps to optimize organizations’ decision-making processes more, and in turn, enables them to reduce a company’s day-to-day non-financial risks. 

Overall, this meta-study of 1000 studies on ESG demonstrates that ESG drives better corporate performance and investment returns. It is heartening to see corporate America recognizing its ESG responsibilities, not just focusing on short-term profits and shareholder value. As BlackRock’s Larry Fink wrote in his influential 2019 letter to CEOs, he states “profits are in no way inconsistent with purpose—in fact, profits and purpose are inextricably linked.”