The impact of ESG and corporate culture on company performance

By: John Ninia ’22 (CALS), EMI Research Assistant
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Investors have been pouring a record amount of money into funds that focus on environmental, social, and governance (ESG) issues and the trend doesn’t seem to be slowing down. ESG funds captured a net $51 billion of new money invested in 2020, more than double the amount in 2019 at $21 billion. Currently, $1 out of every $4 invested is involved in ESG. PwC is planning to hire 100,000 new employees to help tackle climate and diversity reporting. In 2020, following student protests and resolutions from the Faculty Senate and the Employee, Graduate and Professional Student, Student, and University assemblies calling for the university to divest from fossil fuels, Cornell Trustees voted to institute a moratorium on new private investments focused on fossil fuels and to grow its investments in alternative energy technologies. ESG reporting has been around for years but recently, especially since the beginning of the COVID pandemic, it has surged in popularity. Investors, consumers, and employees are demanding that companies be held accountable for their actions and are noticing that those that prioritize ESG issues tend to perform better.

What is ESG?

ESG stands for environmental, social, and governance and it refers to the three main factors that affect the sustainability of a company. The environmental aspect is especially relevant now, with companies around the world scrambling to meet the environmental demands of the Paris Agreement and halt irreversible climate change. Those that have been decreasing their emissions have seen an increase in returns over time. The social aspect of ESG has to do with analyzing the relationships of a company with its employees, customers, the communities it operates in, and more. Workplace health and safety, product safety and quality, and consumer protection are some of the many social metrics that are considered. Finally, governance is the aspect of ESG that focuses on how the company is run. This includes board composition, compensation and oversight of corporate executives, honoring shareholders rights, and more.

How does ESG investing differ from socially responsible investing (SRI) and impact investing?

ESG, SRI, and impact investing are all focused on sustainable investing, though they differ in many ways. ESG views sustainable investing through the lens of the three aspects discussed above. SRI uses an elimination or selection approach to investing based on ethical guidelines — size of charity donations, sale of tobacco/firearms, religious affiliation, and more. Impact Investing focuses most on creating a positive and measurable change in society. The potential positive impact of investing can even be given greater weight than the potential profit.

Regardless of the specific sustainable investment strategy, sustainable investment funds are still more likely to outperform the market. In 2019, 48 percent of large-cap sustainable funds beat the S&P compared to only 26 percent of general large-cap blend funds.

Why is ESG so important now?

ESG is seen as an alternative approach to risk management. In the first year of the COVID-19 pandemic, ESG funds rose between 27.3 percent and 55 percent. Conversely, the S&P 500 only rose 27.1 percent. In June 2020, while the market was climbing back from the large dip caused by COVID, traditional U.S. equity funds were down 8.7 percent while their sustainable counterparts were only down 4.8 percent.

With an increase in demand for environmental and social change within the next few decades, investors are investing more in companies they think will succeed in creating this change. When you invest in a company, you own a piece of it, and that includes all the good and the bad externalities, as well. When investing in a fossil fuel company, you own a piece of all the emissions and environmental damage it causes. Conversely, while investing in a renewable-energy-focused or a socially responsible company, you own the positive impacts it has on the communities it operates in.

In Invest for Good: A Healthier World and a Wealthier You by Mark Mobius, Carlos von Hardenberg, and Greg Konieczny, passive investors are described as playing “no role in shaping economies by allocating resources” to different companies based on their values. Though passive funds make up the majority of U.S. publicly traded equity fund assets, active investing has recently surged in popularity as shareholders realize their power in allocating capital to and participating in companies they think have the power to make positive impacts on society.

This past semester I had the opportunity to intern with Mark Mobius and Carlos von Hardenberg of Mobius Capital Partners in Dubai. I learned more about the importance of active investing and their approach to ESG investing with another aspect they focus on: culture.

ESG + culture

Mobius Capital Partners is an emerging and frontier market asset manager that specializes in ESG. Culture is another dimension to ESG that Mobius Capital Partners (MCP) weighs in its investment process. It is something that can be hard to measure and quantify but can have drastic impacts on a company’s morale and performance. Usman Ali, a partner and ESG analyst at MCP, emphasizes the importance of company culture in returns by citing the fact that one portfolio of companies that were listed under Glassdoor Best Places to Work in 2009 “significantly outperformed the S&P 500 with an excess return of 265 percent.” Culture can take many different forms but MCP mainly focuses on equality, recruitment and turnover, compensation, and motivation when looking at a potential investment.

Usman also discusses the importance of recognizing the variability of culture, especially in emerging markets. In the West it is normal for employees to suggest new ideas and challenge management; however, in Asia the work environment is often more hierarchical. One is not necessarily more efficient than the other, but it is important to understand that these different approaches exist by region when trying to gauge company culture and employee satisfaction.

ESG in emerging markets

ESG has become extremely important in emerging markets. The theme for the 2020 Expo in Dubai is sustainability. Many of the companies that are leading the way in solar energy, electric vehicles, and water filtration are found in China or South Korea. The notion that ESG is only important to the economies of developed nations is false. The Emerging Market Institute’s upcoming annual conference will also be centered on ESG concerns, as it believes that this decade marks the start of ESG issues becoming absolutely crucial in business and investment decisions.

John Ninia

John Ninia ’22 (CALS), EMI Research Assistant

John Ninia is an undergraduate research assistant at the Emerging Markets Institute and is majoring in environmental and sustainability sciences. He is working with Lourdes Casanova to conduct research regarding emerging markets’ approach to corporate sustainability. His interests include entrepreneurship, emerging multinationals, and sustainability. John is the VP of finance for the Cornell European Business Society and is also interested in international finance.

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