This report aims to support investment decision-makers by reviewing available information on the benefits of integrating sustainability criteria into the investment process, and the degree to which it results in a positive or negative return.

Published in 2015, it synthesises the findings of over 200 sources of research on ESG (academic studies, industry reports, newspaper articles and books).

Overall, these findings suggest:

• Companies with strong sustainability scores show better operational performance and are less risky.
• Investment strategies that incorporate ESG issues outperform comparable non-ESG strategies.
• Active ownership creates value for companies and investors.

Based on the aggregate findings, the report concludes that it is in the best economic interest for corporations, asset managers and investors to incorporate sustainability considerations into decision-making processes.

On the business case for corporate sustainability, the report finds that the literature shows:

• Sustainability topics can have a material effect on a company’s risk profile, performance potential and reputation, and hence have a financial impact on a firm’s performance.
• Product and process innovation is critical, to benefit financially from sustainability issues.
• Medium to longer-term competitive advantages can be achieved through a broader orientation towards stakeholders (communities, suppliers, customers and employees) and shareholders.
• The management of sustainability issues needs to be deeply embedded into an organisation’s culture and values. These may include: responsibility at the board level (ideally the CEO); clear sustainability goals that are measurable in quantity and time; an incentive structure for employees to innovate; external auditors to review progress.

On the relationship between corporate sustainability and corporate cost of capital, the research finds that firms with superior sustainability standards enjoy significantly lower cost of capital, as well as better access to it.

On the link between sustainability and a company’s operating performance, the report finds a debate. It notes the majority of commentators find a positive relationship between aggregated sustainability scores and financial performance, some suggest that there is no correlation, a few argue that there is a negative correlation, while others propose that companies experience a benefit from merely symbolic sustainability actions through increased firm value.

Environmental topics such as corporate environmental management practices, pollution abatement and resource efficiency are mentioned as the most relevant to operational performance.  Social factors such as employee relationships and good workforce practices also have a large impact.

On the relationship between sustainability and stock prices, the report finds:

• Superior aggregate sustainability scores are valued by the stock market: more sustainable firms generally outperform less sustainable firms.
• Stocks of well-governed firms perform better than stocks of poorly governed firms.
• On the environmental dimension of sustainability, corporate eco-efficiency and environmentally responsible behaviour are viewed as the most important factors leading to superior stock market performance.
• On the social dimension, good employee relations and employee satisfaction contribute to better stock market performance.

Additionally of note: various studies found a ‘momentum effect’ regarding ESG parameters. In other words, strategies that assign a higher portfolio weight to companies with improving ESG factors have outperformed strategies that focus on static ESG criteria.

1. Sustainability is one of the most significantly growing trends in financial markets. At the time of this report’s publication in 2015, over 72% of S&P 500 companies were reporting on sustainability – indicating recognition of investors’ growing interest in the topic. (S&P 500 is an index of 500 large companies listed on stock exchanges in the US.)
2. 90% of the cost of capital studies show that sound ESG standards lower the cost of capital.
3. 88% of the studies show that solid ESG practices result in better operational performance.
4. 80% of the studies show that stock price performance is positively influenced by good sustainability practices.
5. Given the evidence in the literature, based on economic impact, the report recommends that it is in the best interest of investors and corporate managers to incorporate sustainability considerations into their decision-making processes.
6. The future of sustainable investing is likely to be active ownership by multiple stakeholder groups including investors and consumers. Active ownership allows investors to influence corporate behaviour and benefit from improvements in sustainable business practices.
7. One reason for an imbalance between businesses' acknowledging the importance of sustainability and acting on it has been pressure from the financial markets’ focus on short-termism – for instance, pressure to deliver financial results in two years or less. However, there appears to be an increasing focus on longer-term thinking. The report gives the example of Unilever's move away from giving earnings guidance and quarterly profit reporting in order to transform the company’s culture and shift management’s thinking away from short-term results.
8. The report recommends there should be ongoing research to identify which sustainability parameters are the most relevant for operational performance and investment returns.