The consequences of integrating ESG constraints for investors A case study on the link between extra-financial and financial performances in times of crisis

Details

Supervisors

De Rongé

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion

Abstract

The growing threats facing society, such as climate change, are becoming key issues for business to address. The rise of SRI and the increasing importance companies place on stakeholders’ expectations demonstrate a common willingness to participate in change. However, much progress regarding sustainable behaviour still needs to be made, particularly by some companies. The aim of this paper is, therefore, to analyse whether companies have a financial interest in integrating sustainability criteria, known as ESG (Environmental, Social and Governance), into their strategy. To this extent, we studied the returns that an investor would have earned from the S&P 500 index in comparison to an index composed solely of the most sustainable companies from the S&P 500 (ESG benchmark) during the Covid-19 crisis. The ESG benchmark has been constructed using a best-in-class strategy, based on companies’ sustainable rating provided by MSCI, which is a financial services company. From this study, it appears that the sustainable index provided slightly higher returns than the S&P 500, but it cannot be concluded that the returns delivered by the former are statistically higher than the ones of the latter. However, it seems that the sustainable index is less risky than the S&P 500, leading investors to have an interest in holding investments in more sustainable companies and, therefore, driving businesses towards a more ethical path by integrating ESG criteria into their strategy.