High ESG plus high EVA margin equals higher return at lower risk, says ISS

A research study by ISS looked at whether environmental, social and governance (ESG ) performance was related to economic value added (EVA) and total shareholder return (TSR).

The study sample comprised of companies across all major stock exchanges covered by ISS with a market capitalisation of US$250m or greater, from 2013 to 2020.

The outcomes of the study showed that:

  • Companies with high ESG ratings and high EVA margins (EVA/sales) had the highest returns and lowest risk
  • High ratings in all three categories of ESG were correlated with higher returns
  • Degree of outperformance for high ESG and high EVA companies was stronger for US and developed markets than emerging markets
  • High ESG and high EVA companies outperformed across all sectors except financials, with the highest outperformance in the energy sector.
  • Utilities ranked the best in terms of ESG performance and Financials the worst
  • Positive correlation between improvements in ESG performance and improvements in financial performance, including higher EVA margin, EVA spread, return on invested capital, sales, capital, EBITDAR, EBIDAR/sales, and dividend growth.
  • Since June 2017, ESG scores have improved in all sectors except industrials, consumer discretionary, consumer staples and information technology.
  • Environment and social performance have become stronger indications of returns over time, while the importance of governance performance has declined.

EVA has its own challenges which we have covered HERE.

The study uses ISS own ESG scoring system and EVA methodology. These are not particularly transparent, even if you subscribe.

For the most part the study provides interesting observations, and makes most use of correlation statistics. The study makes no claims on causation, unlike some oft-quoted ESG related studies of doubtful validity. For the full ISS study see HERE.

© Guerdon Associates 2023
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