Does sustainability generate better financial performance? review, meta-analysis, and propositions

ABSTRACT

Sustainability in business and ESG (environmental, social, and governance) in finance have exploded in popularity among researchers and practitioners. We surveyed 1,141 primary peer-reviewed papers and 27 meta-reviews (based on ∼1,400 underlying studies) published between 2015 and 2020. Aggregate conclusions from a sample suggest that the financial performance of ESG investing has on average been indistinguishable from conventional investing (with one in three studies indicating superior performance) – in contrast with research in the wider management literature as well as industry reports. Until recently top finance journals did not publish climate change related studies, yet these studies capture the frontier of corporate risk and ESG investment strategies. We developed three propositions: first, ESG integration as a strategy seems to perform better than screening or divestment; second, ESG investing provides asymmetric benefits, especially during a social or economic crisis; and third, decarbonization strategies can potentially capture a climate risk premium.

KEYWORDS:

• Sustainability
• climate change
• financial performance
• ESG
• meta-analysis
• review

JEL CLASSIFICATION:

• A13
• G23
• G30
• M14
• M41

Acknowledgements

We are grateful to the editor, Olaf Weber, and associate editor, Todd Cort, for their guidance. We thank Rockefeller Capital Management for their support in funding the data collection of this study. Many thanks also go to the research assistant, Maria Pilar Salazar, for her diligent and untiring work in preparing, evaluating, and coding parts of the studies. A seminar at the NYU Stern Center for Sustainable Business provided valuable feedback. In particular, we thank Tensie Whelan, the Director of the Center for Sustainable Business for her support. We are grateful for the leadership support at the NYU Stern Business & Society Program and their input at the work-in-progress seminar in October 2020. We presented the paper at IR Magazine's ESG Integration Forum, CFA UK, Wolfe QES ESG Investment Conference, and the Yale Initiative on Sustainable Finance (YISF) Symposium and thank participants for their questions and feedback. Three unnamed reviewers provided helpful suggestions.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Author statement

UA and TVH wrote the proposal to secure funding and designed the research. UA and TVH developed the codebook. UA led the data collection and analysis. ZL created the investor and climate-themed paper database. CB created the corporate database and analyzed climate-themed papers. UA provided the first draft with input on the framework and propositions from TVH. All authors contributed to the manuscript. All authors reviewed the propositions and provided feedback on all paper drafts. All authors contributed to the online appendix.

Notes

1 Many issues arise from the unclear definition of corporate social responsibility (CSR), ESG, and related terms. The terms related to sustainability also evolved over the years, which is well documented in Van Holt and Whelan (2021). We also adopted their definition of sustainability: ‘(1) at minimum do not harm people or the planet and at best create value for stakeholders, and (2) focus on improving sustainability performance in the areas in which the company or brand has a material environmental or social impact (such as in their operations, value chain, or customers).’ Traditionally, CSR was seen as voluntary (Liang and Renneboog 2017) and beyond the interest of the firm (McWilliams and Siegel 2001). In our study, ESG goes beyond philanthropy or voluntary CSR (e.g. increasing the racial diversity of the board of directors) and includes legitimacy and compliance issues as well (e.g. following safety standards in the automotive industry). Strong ESG performance can also be considered a competitive advantage (Ioannou and Serafeim 2019).

2 For example, in the US the Security and Exchange Commission (SEC) issued a ‘Risk Alert’ titled The Division of Examinations’ Review of ESG Investing highlighting the diverse approaches on April 9, 2021.

3 For example, Matos (2020), in his critical review on ESG investing, distinguished the evidence between ‘Does E&S/CSR Matter?’ and ‘Do ESG/SRI Strategies Pay Off for Investors?’, however, this distinguishment was not foreground.

4 Our original cut-off date of February 2020 excluded all COVID research, so we added a sample of salient articles based on a comparable search strategy (albeit without the detailed coding), which extends until May 2021, for the discussion of the proposition: ESG investing provides asymmetric benefits, especially during a social or economic crisis.

5 Moreover, standard errors do not follow the same logic with respect to heteroskedasticity as in linear models. While in the latter the point estimates remain the same either way, this consistency generally no longer holds in non-linear models. Thus, either the model is reasonably well specified and the robust sandwich estimator makes little difference asymptotically (see Greene (2012, 744) for example) or the model is insufficiently well specified and the robust estimator does not help with estimating the main parameters of interest.

6 We interpret the results of the regression models in descriptive terms, i.e. as multivariate associations, and do not see the models as an application of the Neyman-Rubin potential outcome framework, so causal interpretations are beyond the scope of this analysis.

7 Note that the vast majority of pruned articles are corporate studies because of the 1,141 eligible articles only 159 where investor studies. This implies that the resulting sample of 97 studies are a meaningful representation of the potential complete set of studies.

8 We thank an anonymous reviewer for this suggested explanation.

9 For example, Carney, Mark. 2015. ‘Breaking the Tragedy of the Horizon— Climate Change and Financial Stability.’ Speech given at Lloyd’s of London, September 29; International Monetary Fund (IMF). 2016. ‘After Paris: Fiscal, Macroeconomic, and Financial Implications of Climate Change.’ IMF Staff Discussion Note 16/01, International Monetary Fund, Washington, DC; European Systemic Risk Board (ESRB). 2016. ‘Too Late, Too Sudden: Transition to a Low-Carbon Economy and Systemic Risk.’ Frankfurt; Bank of England Prudential Regulation Authority. 2018. ‘Transition in Thinking: The Impact of Climate Change on the UK Banking Sector.’ London; Lane, Philip R. 2019. ‘Climate Change and the Irish Financial System.’ Central Bank of Ireland Economic Letter 2019 (1). European Central Bank. 2019. ‘Special Feature: Climate Change and Financial Stability.’ Financial Stability Review. Frankfurt. Network for Greening the Financial System. 2019. ‘A Call for Action. Climate Change as a Source of Financial Risk.’ Paris.