Investors injected record sums into ESG funds during the pandemic but many still maintain the notion that ESG investing detracts from performance. To embrace sustainable business practices, they say, means sacrificing returns. 

There’s plenty of pre-pandemic evidence, however, that companies with strong ESG records outperform their peers.

In 2018 Bank of America reported that three years’ worth of returns show companies with strong ESG records outperformed their peers. And just this year, Blackrock reports that 88% of sustainable indexes did better than their non-sustainable counterparts during the first quarter of 2020. Expectations are that ESG criteria will increasingly become central to all investment decisions, particularly as the global health crisis subsides into our rearview mirrors.

During the height of the global pandemic in 2020, large funds with environmental, social, and governance (ESG) criteria outperformed the broader market, according to a report published in April, 2021, by S&P Global. ESG fund managers say their focus on so-called non-traditional risks led to their building portfolios of companies that were resilient to the worst of COVID-19’s negative effects on the overall economy.

ESG Issues Becoming Critical Performance Metric for Investors

How well a company performs on ESG issues is becoming an increasingly critical performance metric for investors, consumers, and management. Investors and rating agencies are demanding ESG reporting. There’s no longer any doubt. Investors now believe that companies with strong ESG strategies that are core to their business objectives perform better and are more stable. 

Research from Harvard Business School professor George Serafeim found that sound strategies not only contribute to corporate outperformance in the long term, they also help them outperform during economic downturns. Professor Serafeim analyzed the performance of more than 2,000 US companies over 21 years. They found that the companies that improved on material ESG issues significantly outperformed their competitors, suggesting that investors are becoming wise enough to see the difference between greenwashing and true value creation. 

Serafeim identified five actions companies can take to get ahead of the trends and realize tangible financial benefits from their ESG programs: 

• Adopt strategic ESG practices.
• Create accountability structures for ESG integration.
• Identify a corporate purpose and build a culture around it.
• Make operational changes to ensure the ESG strategy is successfully executed.
• Commit to transparency and building relationships with investors.

Insights collected from some of the world’s largest institutional investing firms during the past year show that ESG was top of mind for nearly 70 senior executives surveyed. While investors have been voicing interest in ESG-related issues for decades, it’s only recently that their concerns have translated into action. A question corporate leaders are asking themselves today is, “Do our financial disclosures adequately reflect how we’re addressing ESG issues?” 

It’s clear that corporate leadership has become broadly enlightened on this topic. The Conference Board and Datamaran speak to the heightened awareness in their global insights report, The Three Big Wake Up Calls for Boards. The report is worth the read. It points to the importance of corporate social responsibility as we rebound from the pandemic, do something about climate change and make a meaningful difference with our diversity, equity and inclusion initiatives.

ESG is here to stay and will play a crucial role as the global economy emerges from the pandemic and embraces whatever new reality awaits us.