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Big Picture

Nuthin’ but a ‘G’ thang: governance wins out

Nuthin’ but a ‘G’ thang: governance wins out

Thursday 3rd November 2016

Using an objective method of assessing ESG, Hermes Investment Management created historic scores for companies, enabling it to test whether those with the highest scores or most-improving ESG characteristics have tended to outperform

The graph above shows that while companies who pay more attention to environmental, social and governance (ESG) practices generally outperform, it is by focusing on the ‘G’ in ESG that you can really make a difference.
It found while companies with favourable environmental or social characteristics have on average outperformed companies with negative characteristics in these areas, the degree of statistical significance is low. As a result, Hermes says it is still too early to conclude that companies with attractive environmental and social characteristics outperform.
More positively, however, Hermes found no evidence that companies with attractive environmental and social characteristics have tended to underperform. “Our data suggests that investors are able to integrate environmental and social considerations into their stock selection without systematically lowering their returns. Hence it still has merit in lowering risk (and doing good),” it said.
“The impact of governance, however, is unequivocal and reaffirms the key insight from our previous [research]: companies with good or improving corporate governance have tended to outperform companies with poor or worsening governance by 30bps per month on average since the beginning of 2009.”
Hermes said this was largely driven by the companies with the lowest ranked governance scores tending to underperform the average, as opposed to the higher-scoring companies outperforming.
“This suggests that poor governance detracts from performance rather than good governance boosting it,” it added.

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