Corporate governance and ESG performance make good predictors of stock performance

In a recent article titled Corporate Governance, ESG, and Stock Returns around the World, author Mozaffar Khan describes his research findings that companies’ corporate governance and ESG performance are indeed good predictors of stock returns.

In other words, companies that have strong corporate governance practices and that manage their material ESG issues well outperform those that don’t.

This outperformance is significant:

• For corporate governance, the top-quartile-bottom-quartile spread in cumulative return performance was 122 percentage points over the 2009-2017 period, and the top-quartile-bottom-quartile spread in the monthly return performance was 33 basis points (controlled for style, time, and sector differences).
• For ESG performance, the top-quartile-bottom-quartile spread in cumulative return performance was 41 percentage points over the 2013-2017 period, and the top-quartile-bottom-quartile spread in the monthly return performance was 36 basis points (controlled for style, time, and sector differences).

It is also worth noting that the better the measure, the lower the volatility, which is consistent with other research work done on the subject. In conducting his research, the author drew on prior academic literature and existing scoring outputs (from MSCI) to develop his own measures of corporate governance and ESG performance.

You will find more insights on the evolution and implementation of ESG integration in capital markets at the PRI’s 6th annual Quebec Responsible Investment Conference happening November 26 in Montreal.

 

Marie-Josée Privyk, CFA - Content Committee Member, CFA Montréal