The Incentive for ESG is Growing Stronger

30 Sep 2020 22:49 PM

The Incentive for ESG Investment is Growing Stronger


Picture this: you are taking a stroll on Sunday morning through pretty nature reserve and you happen to pass a young puppy who has run away and fallen into a small stream. Its paws are hopelessly thrashing the water and its sweet face looks at you with sheer desperation. It would be no ‘cost’ to help it. Would you just walk past?

I have long been a supporter of an ESG approach to investment (an approach where environmental, social, and governance factors play a key part in investment decisions) based on the ‘no cost’ theory. It has been shown by multiple studies over different time periods that ESG investing does not hurt performance. If you can invest your money in a responsible manner without ‘cost’, why wouldn’t you do it?

2020 has handed us an even stronger incentive for an ESG approach. Companies with high ESG scores have shown to be less susceptible to market fluctuations.

A recent study in Japan divided the top-100 Japanese listed companies into four groups based on their ESG ratings and compared the performance of share prices in the first quarter of 2020. Although most of the firms faced a decline in equity prices, the group with high ESG ratings showed a lower rate of decline and more stable stock prices than the other groups (Figure 1).


Yes, I know that this is a simple study from a single country, however it is supported by earlier research. In 2019, a wider, more comprehensive study was conducted that showed that there is a strong correlation between ESG evaluation and stock price performance in situations where corporate trust is questioned, such as during a financial crisis (Lins and Ane 2019).

Essentially this makes intuitive sense. Environmental, social or governance issues represent company risks. Companies that manage these risk factors well not only reduce the risk to the company but also provide protection against an overall ‘loss of trust.’

Amazon is a company that is well aware of the risks to its share price as a result of perceived poor corporate governance. When recently confronted with criticisms of its working conditions, Amazon quickly announced that it would add more than 170,000 jobs and invest in improved safety measures. Even though this would lead to declines in 2nd quarter profits, they took a long term perspective.

There has not been too much to be excited about in 2020, but the renewed emphasis on looking after the planet as well as ourselves gives me a feeling of hope. The fact that there is a strong correlation between a company’s ESG policy’s and the volatility of their share price is clear evidence that there has been a shift in global values. While I have been a supporter of ESG investment for many years, I am really excited that the wave is growing in momentum and size and the evidence for it is growing stronger.

If you would like to learn more about investing in a manner that is aligned with your values, please get in touch. Marisa is a specialist in ESG investment with over a decade of experience in the area. e

Back to List