Leaders in Environment, Society and Corporate Governance Outperform on Stock Market

July 31, 2007
A study by investment bank Goldman Sachs, has found that companies that are leaders in environmental, social and governance (ESG) performance have outperformed the MSCI World index by 25% since August 2005. Furthermore, 72% of the companies have outperformed their peers over the same period.

Companies need to perform well in five broad ESG categories to capitalise on the opportunities of globalisation while minimising the impact from environmental and social side-effects. These categories are: corporate governance, leadership, employees, stakeholders and environment.
Goldman Sachs has also launched a sustainable investment focus list – GS SUSTAIN – which selects companies with competitive advantage in mature industries and also picks those in emerging industries, such as renewable energy, environmental technology, biotechnology and nutrition.

Goldman Sachs analysed over 120 companies in five sectors (global energy, metals & mining, food & beverages, pharmaceuticals and European media) with respect to three areas: ESG performance; how well they are positioned vis-à-vis long-term industry trends; and the strength of their underlying financial returns. The results were clear – governance or management quality and sustainability are inextricably linked and companies with strong policies in these areas have superior economic returns.

However, the report suggests that analysing ESG in isolation does not correlate with stock market performance – two well known sustainable investing indices, the Dow Jones Sustainability World Index and the FTSE4Good Global Index have underperformed against their respective market benchmarks.
Goldman Sachs state that trends will only intensify, making this methodology helpful for investors and corporate managers alike who wish to establish sustained and sustainable growth.