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ESG Scoring: Study Challenges Traditional Approach

Posted on April 28, 2016 at 5:55 PM

For all those sceptics about the importance of Environmental, Social and Governance (ESG) factors and what you can expect from a company's investment performance....

For those who think the three should never be lumped together anyway.....'what's governance got to do with it?'

And for those who despair of showing 'behaviour matters'

A new study from NN Investment Partners suggests it's all about MOMENTUM.(I am keeping this simple because I know how we all get in the approach to a Bank Holiday.)

What you need to know: This research has been conducted in partnership with the European Centre for Corporate Engagement at Maastricht University, and it evaluated data from more than 3,000 listed companies worldwide.

It challenges the idea that absolute ESG scores are a good indication of what to expect from a company in terms of investment performance. "During the evaluation period, the shares of those companies with the highest ESG scores tended in most cases to under-perform lower-scoring counterparts."

BUT "the research 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 NN Investment Partners

"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" said Jeroen Bos.


 “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” he added.


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


“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” said Mr Bos.

Categories: Green Issues, Measurement, Investors