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How do ESG scores relate to financial returns?

Svetlana Borokova
Svetlana Borokova
Head of Quantitative Modelling at Probability & Partners and Associate Professor at Vrije University Amsterdam
Ying Wu
Ying Wu
Financial Modeller at Probability & Partners

What is the relationship between financial returns of firms and their scores on sustainability issues? A white paper by Refinitiv and Probability & Partners analyzes the relationship between Refinitiv ESG scores of large cap firms and their financial performance.


  1. Research by Refinitiv and Probability & Partners analyzes the relationship between ESG scores and financial returns of large firms worldwide.
  2. The research showed that high scores can have a positive impact on financial returns. However, there are regional variations with some regions faring better than others.
  3. During the COVID-19 pandemic, firms with high scores recorded lower financial losses than those with lower scores.

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The availability of environmental, social and governance (ESG) data has increased significantly over the past few years, driven in great part by millennials who are committed to sustainability.

While the intentions of these, and other investors, are clear, it is challenging to successfully incorporate sustainability into investment management.

To drive sustainability, ESG performance data must be added to traditional expected return and volatility measures to assess the quality of investment portfolios.

The problem of adding data from three categories with many subcategories can be challenging.

Download the white paper now: ESG vs Financial Performance of Large Cap firms

Refinitiv ESG data categories and subcategories

Refinitiv ESG data categories and subcategories. How do ESG scores relate to financial returns?

Refinitiv ESG scores

Refinitiv provides ESG scores that include official company disclosures of ESG metrics. With these metrics to hand, it becomes possible to assess the relationship between scores and the financial performance of a firm.

While previous academic studies, most of which focus on U.S. firms, suggest there is no significant relationship between ESG and financial performance, the investment community is split into two camps.

One side believes ESG comes at a cost of financial returns, while the other thinks that good ESG performance promises better returns and lower risk in the future.

The Refinitiv white paper, ESG versus financial performance of large cap firms: The case of EU, US, Australia and South-East Asia, takes a broader geographical approach to answer the question of how the relationship between ESG performance and returns works in different markets.

Refinitiv ESG scores, including controversy scores, were used in the analysis of the relationship.

The scores are available for 9,000 stocks that together represent 80 percent of global market capitalization. Refinitiv continues to add stocks and collects more than 450 ESG-related variables for each company it covers.

Visual highlighting ESD data coverage at Refinitiv

The stock universe comprises data covering the period of 2010 to 2018 from the S&P 500, STOXX 600, Australia ASX 300, Japan Nikkei 500, China A-share, and South Korea KOR 200 indices. Together, they cover more than 2,000 large cap companies.

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Calculating the scores

Exploring the relationship between ESG scores and financial performance data has two steps:

  1. Correlations between firms’ ESG scores, returns, volatilities, and market value were explored.
  2. A panel data regression model was implemented to observe individual companies through time and use company characteristics and ESG scores to explain stock returns.

Download the white paper for more details

What do the scores tell us?

Correlated data
Correlating ESG scores, returns, volatilities, and market value resulted in two key themes across all four regions within the analysis:

  • Correlations between ESG scores and market value were positive and significant for the period of 2010 to 2018 across all regions. This suggests larger firms exhibit better ESG performance because they have more means by which to invest in sustainability, and therefore improve their scores.
  • Correlations between ESG scores and volatility of returns were negative and significant for the same period across all regions. This suggests that firms with high ESG scores are less volatile than their lower scoring counterparts.

Panel data regression model
Results from the panel data regression model do show variation across regions:

  • EU firms with high ESG scores tend not to experience reduced returns and, instead, enhance returns.
  • Australian firms with high ESG scores tend not to experience reduced returns, although a significant positive relationship between ESG scores and returns has not been identified.
  • U.S. firms with high ESG scores tend to have lower volatility.
  • Smaller Asian firms with high scores and volatility are more likely to generate higher returns.

These headline results are influenced by the depth of focus on sustainability and level of investor demand for stocks of firms with high scores in each region.

The impact of COVID-19
Finally, the analysis considers the resilience and performance of sustainable firms during the COVID-19 pandemic.

Performance of firms during the COVID–19 pandemic

Performance of firms during the COVID--19 pandemic. How do ESG scores relate to financial returns?

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Looking at the losses of firms in the top and bottom 10 percent of ESG scores from January to May 2020, the top 10 percent ESG-scoring firms, losses were only two-thirds of those experienced by the bottom 10 percent of firms.

As the paper concludes, these results are ‘remarkable’.

Download the white paper to view the research in full — ESG vs. Financial Performance of large cap firms: the case of EU, U.S., Australia and South-East Asia


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