annual review indst 2024 public - Flipbook - Side 13
Annual Review 2024
Measuring
the success
of 20 years of
engagement
EOS has been engaging with companies for two decades, across a
variety of governance, environmental, social and risk issues. But just
how successful has it been, and how do academic studies measure this?
Bruce Duguid and Hannah Heuser assess the evidence.
Engagement is an effective tool for investors to ensure
that businesses are managed in a way that aligns with
their long-term interests. It can mitigate risks and support
resilience, helping companies identify opportunities for
responsible growth.
Academic studies from the last two decades have
demonstrated that companies with better ESG credentials
perform better, and that engagement can reduce risk at
individual companies. EOS’s systematic log of engagement
activity and outcomes over the past 20 years has provided a
basis for some of these studies, as well as research by Professor
Andreas Hoepner presented at our client advisory councils.
When looking at the evidence that disentangles the
relationship between ESG integration, engagement, and
company performance, we can split the type of research that
exists into two broad categories: studies that analyse whether
robust governance and responsible business practices are
associated with better economic performance, and studies
that analyse the effectiveness of engagement on
company performance.
Greater resilience
A 2015 meta-study found that companies with better ESG
performance had, on average, a lower chance of going
bankrupt, more stable cash flows, and were more resilient to
external policy shocks, such as tightening regulation.1 These
findings were largely confirmed by a 2021 meta-study.2 This
paper reviewed more than 1,000 other studies exploring the
relationship between the management of material ESG-related
risk factors and financial performance between 2015-2020.
1
Bruce Duguid
Head of Stewardship, EOS
Hannah Heuser
Theme co-lead: Climate Change
The majority of the peer-reviewed studies found a positive
relationship between ESG-risk management and financial
performance when measured by operational metrics such as
return on equity, return on assets, or stock price, and
investment performance measures of alpha or metrics such as
the Sharpe ratio on a portfolio of stocks. The authors found
that enhanced ESG-driven financial performance improves
particularly when looking at longer time horizons. Mediating
factors, such as improved risk management and more
innovation at the companies that implement an ESG strategy
into the wider business strategy, are the key drivers of better
financial performance.
Studies conducted by teams over the years at Federated
Hermes Limited (FHL) similarly show strong correlations
between corporate responsibility and shareholder returns.3
In a study conducted by FHL in 2016, the authors found that
companies with poor governance practices underperform
their peers, with the observation holding true across different
geographies and sectors.
1 – From the Stockholder to the Stakeholder.pdf.
NYU-RAM_ESG-Paper_2021 Rev_0.pdf.
3
Hermes: ESG investing – It still makes you feel good, it still makes you money; 4 – hermes-esg-investing-2018.pdf.
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