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Jul 02, 2019

What research is unearthing about ESG

A roundup of ESG research from the academic world, as collected by Jeff Cossette

Mounting evidence confirms companies can ‘do well by doing good.’ Now researchers are digging deeper into the nuances of that relationship and discovering the need to distinguish between different types of sustainability practices.

A key question facing boards today is whether sustainability amounts to a differentiating strategy leading to competitive advantage or a practice bound to spread through imitation and thus important for corporate survival but not necessarily linked with industry outperformance.

Now comes new research that reveals companies tend to adopt an increasingly similar set of sustainability practices and only firms implementing strategic practices – those less common, more differentiated and difficult to imitate – can reliably hope to achieve superior performance.

‘Over time, most industries see the convergence of best practices,’ observes Ioannis Ioannou, associate professor of strategy and entrepreneurship at London Business School. ‘That’s important for corporate survival and legitimacy. But our results show that companies that adopt the less common sustainability practices are most likely to outperform.’

Analyzing data from MSCI ESG ratings from 2012 to 2017, Ioannou and his study co-author George Serafeim, professor of business administration at Harvard Business School, find that adopting strategic sustainability business practices is significantly and positively associated with both return on capital and expectations of future performance as reflected in price-to-book valuation multiples – whereas assuming the more common sustainability practices correlates only with expectations of future performance.

‘Boards need to monitor trends in their industry to help determine the sorts of practices that can be the foundation for their competitive advantage,’ says Ioannou. ‘And they must also consider that what is strategic today may well become common tomorrow. To stay ahead of the pack you need to be continuously looking for those strategic initiatives that would be hard to diffuse throughout an industry.’

Catastrophe, groupthink and the case for board ethnic diversity
Regulators, investors and diversity advocates have argued that ethnic diversity may strengthen board monitoring. But the first empirical investigation of the issue suggests the domain of debate may need to shift.

‘Women directors have been shown to strengthen monitoring and I expected [similar results] with ethnic minorities,’ says study author Paul Guest, professor of corporate finance at King’s College London. ‘But I didn’t find this at all.’

Sampling 15 years of S&P 1500 data, Guest explores a range of board-monitoring outcomes including CEO compensation, CEO turnover, performance sensitivity, accounting misstatements, acquisitions and performance. He finds ethnicity has no impact on oversight or performance.

‘If you are going to argue [for ethnic diversity], you must make the case on moral grounds,’ concludes Guest. ‘You can’t argue that the company’s performance will improve – because it doesn’t.’

The corporate governance drivers of ESG disclosure
The first meta‐analysis of evidence on corporate governance’s effect on ESG disclosure has clarified which mechanisms best improve communications. Study results show board independence, size and female directorships significantly enhance voluntary disclosure while board ownership and CEO duality have either no influence or a slightly negative one.

Study co-author Nicola Cucari, research fellow at the University of Salerno, says the findings underline the board’s profound influence on ESG disclosure. ‘Unique human competencies and organizational strategies create sustainable competitive advantages for companies,’ he notes. ‘But identifying appropriate corporate governance practices is still a challenge and the ideal board structure remains a question with no universal answer.

‘Outward-facing corporate secretaries able to complement financial with non-financial information can play an important support role in the [ESG disclosure process].’


This article appeared in Corporate Secretary’s special report on ESG engagement, reporting and integration