Investors seeking robust returns should turn their attention to companies with strong environmental, social, and governance (ESG) ratings, as a new study by Kroll, a leading independent provider of global risk and financial advisory solutions, demonstrates.
Kroll analysed over 13,000 companies globally and found that those with higher ESG ratings significantly outperformed their lower-rated peers, with UK firms leading the pack.
Financial incentives
The study reveals that ESG "leaders" globally experienced annual returns of 12.9%, compared to 8.6% for ESG "laggards".
The UK market further underscores this trend: companies categorised as ESG "leaders" yielded an average annual return of 6% in US dollar terms, while "laggards" faced a decline of -2.5%.
Europe sets the benchmark
Europe stands out for its commitment to ESG practices, with nearly a third of Western European companies rated as "leaders". These companies also enjoyed an average annual return of 10%, outperforming the 7% average return for "laggards".
Regulatory framework
Carla Nunes of the Valuation Digital Services Group at Kroll said: "The strong UK figures reflect the country's enduring commitments to ESG initiatives and regulations."
She emphasised that investor confidence in ESG ratings and disclosures will be pivotal for the future of ESG investing.
As new global regulatory standards take shape, ESG considerations are set to remain a significant factor in investment decisions.
The study highlights the importance of a strong ESG materiality framework and anticipates a growing need for technology solutions in data collection.
Behind the numbers
The Kroll ESG and Global Investor Returns Study examined the relationship between ESG ratings and total stock returns from 2013 to 2021, utilising ESG company ratings published by MSCI.
The study's findings make a compelling case for the financial benefits of ESG-focused investment strategies, particularly in the UK and Europe, offering a model for global markets to emulate.