Recent report finds corporations that lead in corporate responsibility also lead in the market.
By Margo Alderton
A new report, released by investment bank Goldman Sachs at the UN Global Compact Summit July 5-6, found that companies that are considered leaders in environmental, social and governance (ESG) policies are also leading the pack in stock performance—by an average of 25 percent.
In an analysis of more than 120 ESG leaders from five different industries—energy, metals and mining, food and beverage, pharmaceuticals and European media—Goldman found that companies in four of the sectors for which it had published reports (energy, mining and steel, food and beverages, and media) outperformed the MSCI world Index by an average of 25 percent since August 2005. 72 percent of the companies on the list outperformed industry peers.
Goldman’s findings are contrary to other findings that “ethical” indices, such as the FSTE4Good and Dow Jones Sustainability Index, have underperformed in recent years. However, that may be because those indices focus only on ESG factors. The companies in Goldman’s analysis were also reviewed for competitive advantage across peers, including financial returns and industry drivers.
“We’re at a point where socially responsible investing is evolving beyond avoidance strategies—eliminating companies that are involved in tobacco, for example—to ones that take an integrated look at ESG,” says Paul Hilton, Interim Director Social Investment Strategy at Calvert, a leading socially responsible investing firm. “This is all part of the same movement to understand how to harness this information for better returns.”
Goldman noted in the report that while there is no correlation between stock market performance and ESG alone, that may in part be due to the time it takes for “superior performance on ESG metrics to feed through into financial performance and stock market recognition.”
Anthony Ling, a Managing Director at Goldman Sachs, stated in a release on Greenwire, “If you are not taking these factors into consideration and investing … you’re going to lose competitive advantage. The success ratio of stocks picked [in the report] is in excess of 70 percent. On a long run average I think the best hedge funds and investors are typically looking at around a 50 percent or 55 percent success rate.”
“The reality is that we [the SRI community] have been doing this for a long time,” says Hilton. “But it’s exciting to see Goldman looking at these factors. This research is not competitive, it’s helpful.”
In conjunction with the study, Goldman has announced the launch of a sustainable investment focus list, called GS SUSTAIN, which includes companies that have been selected by their ESG framework. The initial list is made up of 44 companies; half are from Goldman’s ESG analysis, and the other half are from their analysis of emergent industries. The list will be expanded to include additional sectors, such as the financial sector, and more emergent industries, such as nutrition. Companies on the list include Bristol-Myers Squibb, Merck, Kellogg, Nestle, PepsiCo, BHP Billiton, Royal Dutch Shell, BSkyB and Reuters.
"GS SUSTAIN member companies must score well on a combination of ESG score and industry positioning. This must then translate into improving financial performance and ultimately returns," says Sarah Forrest, Head of GS SUSTAIN Research at Goldman Sachs. "My personal belief is that companies must walk the walk and fully institutionalize ESG factors in their core business models in order to establish and maintain competitive advantage and outperform. In our analysis of ESG indicators across five sectors disclosure remains an issue, the data is hard to get and is not consistent. We call on companies, industry groups and regulators to address this challenge."
You can read the full Goldman Sachs Report online: