While governance showed more financial significance in the short term, environmental and social issues’ contributions to stock-price performance unfolded largely over our full 13-year study period.
As opposed to “event” risks that were more immediately priced in by investors, some issues, such as carbon emissions, presented a risk of “erosion” to competitiveness over time and degraded financial performance over a longer time horizon.
Over the 13-year span of our study, an overall ESG score that aggregated industry-specific weighting of all three E, S and G pillars showed better long-term results than any of the individual pillar indicators.
Focusing on the long term has become a mantra of many institutional investors who have adopted environmental, social and governance (ESG) investment principles over the past decade. But does ESG really address companies’ long-term risks and performance? Our research indicates that some ESG issues are more long-term than others.