ESG contributes to investment performance

NN Investment Partners (NN IP) has published a new study demonstrating the links between various ESG (environmental, social and governance) factors and investment performance. The research, conducted in partnership with the European Centre for Corporate Engagement (ECCE) at Maastricht University, evaluated data from more than 3,000 listed companies worldwide.

NN IP says it demonstrated a clear positive relationship between incremental changes – or momentum – in a company’s ESG scores and investment performance. Stocks with positive momentum in ESG scores outperformed those with negative momentum, with the strongest positive performance effect found by companies with medium ESG scores.

Jeroen Bos, head of equity specialties at NN IP said: “The results have a number of critical implications for investors. Until now ESG scoring and its application has mostly been focused on absolute scores. This research reinforces NN IP’s longstanding belief that an absolute ESG score is insufficient to provide a complete understanding of a company’s ESG behaviours and the consequences for risks and returns.”

“So far ESG scoring and its application in the investment industry has been one-dimensional, focusing on absolute ESG scores. This study opens up the debate as to whether a two-dimensional approach, combining absolute scores with ESG momentum is more appropriate.”

Among other outcomes, the research also demonstrated that the exclusion of firms with controversial behaviour from the investment universe helped improve performance in the research period.

Bos continues: “The exclusion of ESG controversies has been shown to be a relatively simple way to improve portfolio performance. Contrary to popular belief in the industry, it appears that exclusion can clearly enhance rather than harm investment performance, depending on the issues considered.”

NN IP says it is using the outcomes of the research to further enhance its company analysis and portfolio positioning with regards to ESG momentum and controversies. In the company’s sustainable equity portfolios specifically, NN IP is already overweight stocks with positive ESG momentum and continues to scrutinise companies based on controversial behaviours.

Bos concludes: “We see much scope for further research into the materiality of ESG factors and controversies. We have recently started the next phase of our research collaboration with ECCE in which we investigate the effects of certain governance factors on the investment performance of emerging markets stocks.”