ESG Provides Slight Edge

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    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, says Gary Hewitt, head of research at GMI Ratings. Speaking as part of a panel discussion on socially responsible investing (SRI) performance at the 2014 Canadian Responsible Investment Conference, he said 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. The median ESG company’s TSR slightly outperformed its non-socially responsible peer (three per cent cumulatively over three years). Board oversight, also had a positive effect on TSR. The research shows that when boards focus on ESG factors they typically experience a lower number of events ‒ such as spills, pollution, recalls, and ethical violations ‒ which can have a negative impact on the TSR. 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.