Early research from New York-based GMI Ratings indicates that companies that consider environmental, social and governance (ESG) issues in their executive pay and board oversight have a slight edge over their peers who do not.

Gary Hewitt, head of research, GMI Ratings, discussed the new findings as part of a panel discussion on socially responsible investing (SRI) performance at the 2104 Canadian Responsible Investment Conference in Toronto on Tuesday.

The research compared the total shareholder return (TSR) of U.S. companies between 2011 and the first quarter of 2014 of companies that include ESG factors in executive pay and board oversight against those that did not.

According to the research, the median ESG company’s TSR slightly out performed its non-socially responsible peer (3% cumulatively over three years), meaning a company in the same industry with similar market capitalization.

“It’s not huge over three years but it’s meaningful,” said Hewitt. “I think everyone would like 3% if they can get it.”

The second factor examined as part of GMI’s research, board oversight, also had a positive effect on TSR. GMI’s research examined SRI and non-SRI companies over 12 quarters and compared the number of ESG events they each experienced.
Results show that when boards focus on ESG factors they typically experience a lower number of events, such as spills, pollution, recalls and ethical violations, said Hewitt, which can have a negative impact on the TSR.

According to Hewitt, these preliminary results indicate that there is at least a case to be made for companies to seriously consider adding ESG metrics to their board mandates and executive compensation. “I don’t know if it’s proof yet,” he said, “but it’s starting to be persuasive.”

Hewitt added that these findings cannot be used to predict investment returns for a company as the returns in the study are from the same time period as the ESG events and as such are not a direct reflection of an event(s) effect on share price.