Previously, findings of correlations between environmental, social and governance (ESG), and corporate financial performance (CFP), were not explicitly evident. This study examines all primary and secondary data of academic review studies on the correlation between ESG and CFP. This leads to the combined examination of 2200 academic studies from 1970 to 2014, allowing for robust and credible conclusions and generalisations to be made.

The findings show that 90% of studies examined demonstrate a non-negative relationship between ESG and CFP. In fact, a strong positive relation can be found, that is seen to be stable over time. Positive findings are obtained, even when studies use a variety of portfolio methodologies, and differentiate across regions and asset classes such as bonds and emerging markets.

Research method

A two-step research method is utilised that includes vote-count studies and meta-analyses. Vote-count studies calculate the number of studies that are positive, negative and neutral; with the category with highest votes considered the winner. The meta-analyses aggregates the findings from econometric studies in order to derive second order meta-analysis. The data set of more than net 2200 studies is 35 times larger than the average of previously aggregated studies. Ultimately the comprehensive dataset allows for credible conclusions to be made.

Key findings of research include:

• 47.9% in vote-count studies and 62.6% in meta-analyses saw positive findings
• 6.9% vote-count studies, and 8.0% meta-analyses, find a negative ESG-CFP relation
• The average correlation level for both methods was around 0.15 which, as this is greater than zero, demonstrates a positive relationship

Portfolio vs non-portfolio

When differentiating between portfolio and non portfolio studies it is evident the share of positive results is considerably different. Positive results decrease in portfolio-related studies to 15.5%, compared to non-portfolio studies which increase to 56.7%. Furthermore, the negative studies increase for portfolio-related studies to 11% compared to non-portfolio studies of 5.8%.

Effect of ESG on asset classes

Findings also saw the impacts of ESG affect certain assets classes more positively than others. Non-equity asset classes including bonds and real estate demonstrate a more significant positive share of findings compared to equities. 36 bond studies analysed show 63.9% of positive votes and the 7 studies on green real estate show 71.4% of studies showing a positive relationship.

Effect of ESG on regions

Findings of the study see two key patterns emerge. First, developed markets excluding North America see a smaller positive result: North America has 42.7% positive findings compared to developed Europe with 26.1% positive. Second, emerging markets demonstrate a higher positive ratio of 65.4% which is considerably higher than developed markets.

Ultimately the correlation averages from both vote-count and meta-analyses studies have a high relevance for competitive global securities markets. Thus, based on the numerous empirical studies and correlation factors, it is concluded that there is in fact a strong business case for the positive relationship between ESG and CFP. This is also evident across asset classes and regions, however portfolio studies remain an exception. This outlier could potentially be the cause for the historic misperceptions around the relationship between ESG and CFP.

1. The orientation toward long-term responsible investing should be important for all kinds of rational investors in order to fulfil their fiduciary duties and may better align investors’ interests with the broader objectives of society.
2. More than 2000 empirical studies suggest a positive relationship between ESG and CFP.
3. The contrary perception of investors that there is no ESG and CFP relationship may be biased due to findings of portfolio studies, which exhibit, on average, a neutral/mixed ESG–CFP performance relation.
4. Regional findings reveal that within developed markets, there is a higher share of positive results from North America compared to Europe and Asia/Australia.
5. ESG outperformance opportunities exist in many areas of the market; in particular, for Emerging Markets, and in non-equity asset classes.
6. There is a relatively even positive relation for E, S, and G factors, with neither having a dominating effect on CFP. Governance-related aspects, however, demonstrate the highest percentage of negative correlations.
7. Investors must remain wary that market risks and costs of portfolio implementation could negatively affect pure ESG performance.
8. Despite the challenge of gaining the existing ESG alpha after implementation costs, it is expected that sophisticated investors are more likely to do so.
9. A detailed and profound understanding of how to integrate ESG criteria into investment processes is required, in order to harvest the full potential of value-enhancing ESG factors.
10. Investors' uptake of ESG will encourage companies to prioritise sustainability and ethical practices, improving society as a whole.