Below is an excerpt from ISS EVA’s recently released paper “ESG Matters: How ESG and EVA Indicators Relate to Market Performance”. The full paper is available for download from the Institutional Shareholder Services (ISS) online library.
- Stocks with high ESG Performance and High EVA tend to outperform.
- Companies with High ESG performance also tend to be less cyclical.
Investing with a focus on ESG and EVA generates excess shareholder returns
Environmental, Social, and Governance (ESG) indicators measure how well a company is addressing the concerns of both society (as reflected in the Environmental and Social indicators) and shareholders (as reflected in the Governance indicators). Economic Value Added (EVA) measures a company’s true profitability.
High-ESG stocks outperform, as do high-EVA companies. Companies that combine high ESG with high EVA tend to have especially good performance. Investors therefore may wish to pay careful attention to both ESG and EVA indicators.
To illustrate the significance of positive ESG indicators, we have plotted the total shareholder returns of two portfolios against the benchmark (Figure 1). The ‘Best Quintile’ portfolio is made up of the companies that score in the top 20% of our ESG Performance Score; the ‘Worst Quintile’ is made up of the companies that score in the bottom 20% of our ESG Performance Score. The two portfolios and the benchmark (companies that comprise the top 99% of the cumulative market cap within EVA’s 23,000+ company coverage) are all equal weighted to avoid outperformance driven by particularly good performance by just a few of the mega-cap companies.
The results are that the top quintile has outperformed the benchmark by an average of 22bps/month since December 2012. The bottom quintile has underperformed the benchmark by an average of 9bps/month over the same time period. The top quintile has outperformed the bottom quintile 62% of the time with an average spread of 31bps/month.
Figure 1: ESG Performance Scores
Source: ISS ESG’s ESG Performance Score. Returns data from S&P.
Explore ISS ESG solutions mentioned in this report:
- Understand the F in ESGF using the ISS EVA solution.
- Identify ESG risks and seize investment opportunities with the ISS ESG Corporate Rating.
By: Casey Lea, Global Director of Quantitative Research, ISS EVA