Considering Social Factors Doesn't Have to Cost Investment Returns

Specific environmental, social, and corporate governance (ESG) factors can have a positive impact on portfolio returns, according to a new Mercer report.

In its new report, “Shedding Light on Responsible Investment: Approaches, Returns and Impacts,” Mercer summarizes and comments on 16 academic studies—10 of which demonstrate a positive relationship between ESG factors and companies’ financial performance, four of which show a neutral relationship, and two which show a neutral to negative relationship.

The academic studies of note that measured the impact of environmental factors on financial performance suggest, overall, that the materiality of environmental factors varies across industries and that the financial community assigns more importance to evaluating how environmental factors affect firm value in high-environmental-risk industries than in lower-risk industries, according to the report.

The studies that measured the impact of social factors on financial performance found that improved social performance of companies in an investment portfolio can lead to improved financial returns, while studies that measured the impact of governance factors on financial performance found that strong corporate governance—and promoting this through engagement—has a positive impact on firm and portfolio performance.

The report said studies that focused on measuring the impact of screening out “sin” stocks (i.e. tobacco, arms, etc.) found, for the most part, either neutral or positive effects on financial performance.

“The idea that responsible investment does not have to come at a cost to performance is becoming well established in the institutional investment industry,” said Tim Gardener, global chief investment officer for Mercer’s investment consulting business.

An executive summary of Mercer’s report is available at