More Valuable, Material Insights


Environmental, Social, and Governance (“ESG”) are the main factors used to measure the sustainability or ethical impact of an investment. Numerous underlying elements make up the main ESG factors, such as carbon output, gender diversity, legal actions, etc.

Traditional ESG metrics focus on corporate impact and provide ratings systems that measure sustainability or quality. However, these impact-oriented ratings, especially aggregated “total” ESG scores, typically don’t integrate financial performance metrics and may miss which ESG factors are materially linked to returns.

NOTE: The adjacent chart shows that on average Social factors have been the most material to performance, while Impact ESG “Total” Scores are nearly immaterial.


Growing research suggests that ESG factors contribute to a company’s financial performance, especially over the longer term. To prove that assertion, we built two model stock portfolios — one based on traditional Impact ESG factors, the other upon more selective Performance ESG factors — and backtested them over 5+ years. Our results (shown in the charts below) show that, indeed, ESG factors can improve returns. Hence, it is critical that investors pay closer attention to ESG and understand which factors matter the most.


NOTE: “Impact ESG Leaders” are the top 30% of US stocks from our normalized, ranked universe based on ESG factors. “Performance ESG Leaders” are the top 30% showing correlations between ESG factors and improved alpha. Both portfolios were equally-weighted and rebalanced monthly for the test, which spanned from March 2013 to May 2018.

Our analysis of ESG factors’ performance materiality over time reveals informative trends and patterns (see the chart below). By closely watching these levels change, along with their relationship to both a company’s ESG impact rating and financial performance, we can make forecasts of what a company’s ESG impact rating and stock returns are likely to be one year out. This innovation allows investors to see into the future through the lens of ESG.