Sustainable and profitable: on the stock market, companies with a high ESG rating yield 50% more than others

The data at a global level is encouraging, still a record for European companies

Is it possible to reconcile sustainability and profitability? Absolutely yes, on the contrary: companies with better ESG ratings generate better average annual stock returns (and not by a little).

This is highlighted by the new Kroll report “ESG and global investor returns” which shows that the best performing companies at an ESG level recorded average annual stock returns of 12.9% compared to 8.6% of companies with lower ESG ratings. Practically, the most sustainable companies have returned almost 50% more on the stock market of those less engaged in the field of sustainability.

The report by Kroll, a leading company in the supply of solutions dedicated to risk management and financial consultancy, analyzed the data of over 13,000 companies from different sectors around the world, highlighting an excellent ROI (Return on investment) for those who invested in companies very active in the field of sustainability.

The ESG performance of European companies

The proportions recorded at a global level are similar to those in Europe, where average annual stock returns stand at 10% for companies with the highest ESG ratings and 7% for those with the worst ratings.

Valuations change when considering not only stock returns, but also the spread of sustainable commitment among companies. In fact, as emerges from the report, almost in December 2021 a third of European companies positioned themselves among the leaders in ESG ratings and only 7% recorded low rating levels. In contrast, only 10% of North American companies and 6% of Asian companies had high ESG ratings.

The data from the Kroll report agrees with the Influence Map ranking where it is 16 of the 27 leading companies in the sustainable transition are European identified by the think tank.

The “ESG and global investor returns” report therefore highlights a huge gap with other continents: compared to the 7% in Europe, 17% of the companies analyzed in North America and 38% of those observed in Asia were found to have a low rating.

The commitment of the institutions and expectations for the future

The sustainable commitment of community institutions is the main matrix of these results, as stated by Carla Nunes, managing director and global leader of Kroll’s Valuation Digital Services practice: “The positive results obtained by European companies can be explained by the region’s long-standing commitment to the issues Exg.

It is therefore not surprising that Europe is at the forefront of sustainability, and, thanks to important legislation such as the EU Regulation on the Disclosure of Sustainability Information in the Financial Services Sector (SFDR), which came into force at the beginning of the year, and the recently approved European Sustainability Reporting Standards (ESRS), we expect this trend to continue.”

However, the path is still long, thinking that the road has already been traced is a risk: “The future of investments in the ESG and sustainability fields – warned Nunes – will depend on the Investor confidence in the reliability of ESG ratings and disclosures and in their relevance as an indicator of the performance of listed companies”.

On this front, not all the data is encouraging: in 2022, for the first time, the issuance of green, social, sustainable and sustainability-related bonds marked a contraction compared to the previous year.

The fifth edition of the Emerging Market Green Bonds Report quantified in The value of GSSS bonds is 877 billion dollars (Green, Social, Sustainability and Sustainability-Linked Bond) issued last year, with a 13% reduction compared to 2021.

Only partially negative news for the world of green finance, given that the GSSS bonds have proven themselves anyway more resilient than the overall fixed income market where the drop in emissions was double that of GSSS bonds, with a reduction of 26% compared to 2021.

“The results of the report are very interesting and important also for companies operating in Italy and which have to deal with dynamics interconnected with the rest of the world; issues related to sustainability must in fact be managed correctly and have a significant impact on the value of assets,” commented Enrico Rovere, managing director of Kroll’s valuation advisory practice in Italy.

In fact, the importance of ESG issues is increasingly central to our companies, as demonstrated by the data from the Sustainability Governance observatory conducted by Altis and CSR Manager Network where it emerged that 35 out of 40 Italian companies, or 87, 5% of the total, integrate sustainability into governance structures having assigned a ad hoc committee within the Board of Directors. In France this percentage reaches 72.5%, in the United Kingdom 65%, in Spain 40%, in Germany only 13.3%. The observatory’s study also highlighted a growing importance of ESG issues in the remuneration schemes of top management in Italy.

“As highlighted by the research – added Rovere – a high ESG rating allows the organization and its market performance to be improved and the value of companies to grow, making them increasingly attractive to private equity funds and thus creating a ‘further leverage for the generation of value.”