ESG AND FINANCIAL

PERFORMANCE:
Uncovering the Relationship by
Aggregating Evidence from 1,000 Plus
Studies Published between 2015 – 2020
By Tensie Whelan, Ulrich Atz, Tracy Van Holt and Casey Clark, CFA
Executive Summary

Meta-studies examining the relationship between ESG and financial performance have a decades-long
history. Almost all the articles they cover, however, were written before 2015. Those analyses found positive
correlations between ESG performance and operational efficiencies, stock performance and lower cost of
capital. Five years later, we have seen an exponential growth in ESG and impact investing – due in large
part to increasing evidence that business strategy focused on material ESG issues is synonymous with high
quality management teams and improved returns. A case in point: A recent study looked at the initial stock
market reaction to the COVID-19 crisis (up to March 23) and found that companies scoring high on a “crisis
response” measure (based on Human Capital, Supply Chain, and Products and Services ESG sentiment) were
associated with 1.4-2.7% higher stock returns (Cheema-Fox et al., 2020). Nevertheless, the topic continues to
be debated, with some arguing that companies and investors should stick to managing for stock price and
that ESG is, at best, a distraction from the real business of making money.

The authors of this report, NYU Stern Center for Sustainable Business and Rockefeller Asset Management,
collaborated to examine the relationship between ESG and financial performance in more than 1,000
research papers from 2015 – 2020. Because of the varying research frameworks, metrics and definitions,
we decided to take a different approach than previous meta-analyses. We divided the articles into
those focused on corporate financial performance (e.g. operating metrics such as ROE or ROA or stock
performance for a company or group of companies) and those focused on investment performance (from
the perspective of an investor, generally measures of alpha or metrics such as the Sharpe ratio on a portfolio
of stocks), to determine if there was a difference in the findings. We also separately reviewed papers and
articles focused on low carbon strategies tied to financial performance in order to understand financial
performance implications through the lens of a single thematic issue.

We found a positive relationship between ESG and financial performance for 58% of the “corporate” studies
focused on operational metrics such as ROE, ROA, or stock price with 13% showing neutral impact, 21%
mixed results (the same study finding a positive, neutral or negative results) and only 8% showing a negative
relationship. For investment studies typically focused on risk-adjusted attributes such as alpha or the Sharpe
ratio on a portfolio of stocks, 59% showed similar or better performance relative to conventional investment
approaches while only 14% found negative results. We also found positive results when we reviewed 59
climate change, or low carbon, studies related to financial performance. On the corporate side, 57% arrived
at a positive conclusion, 29% a neutral impact, 9% mixed and, 6% negative. Looking at investor studies, 65%
showed positive or neutral performance compared to conventional investments with only 13% indicating
negative findings. A detailed breakdown can be found in Figure 1.

These findings were supported by an additional meta-meta-analysis (a study of existing meta-studies) we

undertook. We found 13 corporate meta-analysis studies published (covering 1,272 unique studies) with a
quantitative approach and 2 investor meta-analysis studies (covering 107 unique studies) published since
2015. The former found consistent positive correlations between ESG and corporate financial performance;
the latter found that ESG investing returns were generally indistinguishable from conventional investing
returns. (Figure 2). We concluded that these two findings are robust across time and space.

2 ESG and Financial Performance

 Research over the last five years appears to be producing more
We drew six conclusions about conclusive results, but it is worth acknowledging the challenges
the relationship between ESG with inconsistent terminology, insufficient emphasis on “material”
and financial performance after ESG issues, ESG data shortcomings, and confusion regarding
examining the 1000 plus different ESG investing strategies.
individual studies.
• Research covering ESG and financial performance often suffers

1. Improved financial
performance due to ESG
from inconsistent terminology and nomenclature. Meuer et al.
(2019) found 33 definitions of corporate sustainability in usage.
becomes more marked over For corporations, embedded sustainability (ESG is part of the
longer time horizons. business strategy) may have different performance implications
than traditional Corporate Social Responsibility (CSR) efforts
that emphasize community relations and philanthropy, yet
2. ESG integration, broadly
speaking as an investment
there has been insufficient review of those differences, creating
noise in the findings (Douglas et al., 2017). We see some of
strategy, seems to perform
that confusion in a study by Manchiraju and Rajgopal (2017)
better than negative
which assessed the (poor) financial performance of companies
screening approaches. A
required to spend 2% of their profits on CSR by the Indian
recently released Rockefeller
government. In this case, CSR was philanthropy and community
Asset Management study
relations, not sustainability related to the material ESG issues
finds that ESG integration
that could enhance long-term performance.
will increasingly be
demarcated between • Research often fails to distinguish between material and
“Leaders” and “Improvers” immaterial ESG issues as well as ESG leaders versus improvers. For
with the latter showing example, Khan et al. (2016) demonstrate the alpha potential when
uncorrelated alpha- incorporating “material” ESG issues, with the stock performance
enhancing potential over of companies focused on material issues outperforming those
the long-term (Clark & that focuses on immaterial ESG issues or no ESG issues at all.
Lalit, 2020). Rockefeller Asset Management’s research shows similar results:
one study emphasizes that ESG integration will increasingly be
demarcated between “Leaders” and “Improvers” and finds long-

3. ESG investing appears

to provide downside
term alpha enhancing potential when focusing on material ESG
issue improvement (Clark & Lalit, 2020).
protection, especially during
• The results are also complicated by the lack of standardization
a social or economic crisis.
with ESG data. Studies use different scores for different
companies by different data providers. Eccles et al. (2017), for

4.
Sustainability initiatives example, reviewed a global survey of institutional investors and
at corporations appear concluded that “the biggest barrier is the lack of high quality
to drive better financial data about the performance of companies on their material
performance due to ESG factors.” Plenty of technical evidence also points to the
mediating factors such as shortcomings of accounting metrics and ESG data (Berg et
improved risk management al., 2019). We found that at least 40% of studies relied on an
and more innovation. overall, third-party ESG score.
• ESG integration, ESG momentum, decarbonizing, socially

5. Studies indicate that responsible investing (SRI), negative screening, and impact
managing for a low carbon investing are just a few of the varied approaches referenced
future improves financial in the research. They are often merged together, even though
performance. each has different risk-reward implications. A common research
approach is to query Bloomberg for funds labeled ESG – those
funds are self-designated, and may lack a robust ESG investing

6. ESG disclosure on its own

does not drive financial
framework. Studies can also confuse the outcome by failing to
distinguish between performance of a strategy seeking market
performance. rate or excess returns versus a strategy prioritizing positive
environmental and social impact while accepting concessionary

3 ESG and Financial Performance

 returns. Hernaus (2019) is an exception: she found that financial performance differed based on the
sustainable investing strategy employed by European fund managers. She writes, “previous studies have
predominantly treated SRI as homogeneous (Schroeder, 2007; Rathner, 2013) and have not distinguished
between particular, different SRI strategies available, whose number and diversity (European Sustainable
Investment Forum – Eurosif, 2012; US SIF, 2012; European Fund and Asset Management Association, 2016)
reflect the great heterogeneity of this financial phenomenon (Sandberg et al., 2009).” Investors seem
to be making a distinction; Eurosif found that ESG integration grew at a compound annual growth rate
(CAGR) of 27%, while negative screening fell 3% (Eurosif, 2018).

Some of the earlier short-comings in the corporate research have been addressed in the last five years,
which may be why we have more clear positive findings. However, academic researchers continue to be
challenged by the variability of ESG data and the lack of distinction between different investment strategies,
creating an opportunity for investors and researchers who can overcome this challenge. Judging from the
fact that the volume of research produced since 2015 is comparable to all papers published before 2015, this
is clearly an area where we should expect to see increased and improved research in coming years.

Figure 1. Positive and/or neutral results for investing in sustainability dominate. Very few studies found a negative
correlation between ESG and financial performance (based on 245 studies published between 2016 and 2020) .

58%
57% Corporate (all) Investor (all)
Corporate (climate change) Investor (climate change)

43%
33%
29% 26% 28%
21% 22% 22%
13% 14% 13%
9% 8% 6%

Positive Neutral Mixed Negative Positive Neutral Mixed Negative

Figure 2. Conceptual overview of how investing in sustainability/ESG drives financial Investor-focused studies
performance: We reviewed and categorized relevant academic studies and analyzed tend to look at a direct
them through correlations, mediating factors, and a specific theme – climate change. relationship between ESG
and performance based on
benchmarks and a portfolio-
level view of themes such as
Sustainability materiality or governance
strategy Corporate financial structure. Meta-analytical
& practice Correlation performance effects are Hedges’ g or d.
(CFP) or market
performance
Corporate-focused studies
Climate may include mediating
change factors such as innovation,
action operational efficiency, or
risk management for a
better understanding of how
sustainability initiatives lead
Mediation to CFP. Meta-analytical effects
are partial correlations from
regression models.

4 ESG and Financial Performance

The Results Indicate an
Encouraging Relationship between
ESG and Financial Performance

In reviewing over 1,000 studies published between Many of the studies reviewed described a finding
2015 – 2020, we found a positive relationship and tried to explain it through the lens of a social
between ESG and financial performance for 58% science derived model of the world. Several social
of the “corporate” studies focused on operational science theories dominate the research:
metric such as ROE, ROA, or stock price with 13%
showing neutral impact, 21% mixed results (the same • Stakeholder theory (successful companies need
study finding a positive, neutral or negative results) to manage for a wide variety of stakeholders
and only 8% showing a negative relationship. For such as employees, civil society, suppliers and
investment studies typically focused on risk-adjusted investors),
attributes such as alpha or the Sharpe ratio on a • Shared value (companies that create shared value
portfolio of stocks, 33% found positive performance for all stakeholders do better financially),
26% found neutral impacts (in other words,
performed similar to conventional investments), 28% • Legitimacy theory (a social contract between the
had mixed results (positive, neutral, or negative, corporation and society, which, if broken, leads
generally because they examined a variety of to consumers reducing demand or governments
variables and time periods as well as multiple imposing regulatory restrictions),
samples in one study) and 14% found negative • Resource-based view (emphasizing internal
results. In other words, 59% showed similar or better resources such as employees and intangible assets
performance relative to conventional investment for achieving a competitive advantage).
approaches while only 14% found negative results.
We also found positive results when we reviewed Studies most often invoked stakeholder theory
59 climate change, or low carbon, studies related (N=80), but shared value, legitimacy theory and the
to financial performance. On the corporate side, resource-based view appeared in a sizeable share of
57% arrived at a positive conclusion, 29% a neutral studies (16% - 25%).
impact, 9% mixed and, 6% negative. Looking at
investor studies, 65% showed positive or neutral Notably, those studies that did not include a social
performance compared to conventional investments science theory only found a one-in-three positive
with only 13% indicating negative findings. A detailed association with ESG and financial performance,
breakdown is found in Figure 1. whereas the odds were one-in-two on average for
research grounded in social science theories.
These findings were supported by an additional
meta-meta-analysis (a study of existing meta-studies) This finding points toward the need to better
we undertook. We found 13 corporate meta-analysis understand the mechanisms behind the relationship
studies published (covering 1,272 unique studies) with between ESG and financial performance. Ioannou
a quantitative approach and 2 investor meta-analysis and Serafeim (2019) in Corporate Sustainability: A
studies (covering 107 unique studies) published since Strategy? took a closer look at whether sustainability
2015. The former found consistent positive correlations might be considered a strategic approach (leading
between ESG and corporate financial performance; to a competitive advantage) or common practice
the latter found that ESG investing returns were (a set of standards within an industry that confer
generally indistinguishable from conventional investing legitimacy). They find that both options are relevant
returns. (Figure 2). We concluded that these two and that adoption of sustainability over time is
findings are robust across time and space. complex and dynamic.

5 ESG and Financial Performance

Figure 3. Twelve of thirteen meta-analyses (comprising 1,272 studies) found a positive association between some aspects
of sustainability and financial performance (1976-2018).

Study estimate 95% confidence/credible interval

Lopez-Arceiz et al. 2018 0.199 [0.166, 0.232]

Lu & Taylor 2016 0.174 [0.145, 0.202]

Hou et al. 2016 0.158 [0.134, 0.182]

Busch & Friede 2018 0.119 [0.104, 0.134]

Plewnia & Guenther 2017 0.094 [0.062, 0.126]

Gallardo-Vazquez et al. 2019 0.084 [0.068, 0.100]

Hang et al. 2019 0.072 [0.060, 0.084]

del Mar Miras-Rodgriguez et al. 2015 0.067 [0.023, 0.111]

Wang et al. 2016 0.059 [0.045, 0.072]

Vishwanathan et al. 2019 0.030 [0.022, 0.038]

Hoobler et al. 2018 0.023 [0.007, 0.039]

Jeong & Harrison 2017 0.007 [0.001, 0.013]

Rost & Ehrmann 2017 0.004 [-0.004, 0.012]

Modeled mean estimate 0.089 [0.053, 0.127]

0 0.24

6 ESG and Financial Performance

Six Key Takeaways

1. Improved financial performance due to ESG in the academic studies (they serve as proxy
becomes more marked over a longer time horizon for “real-world” applicability; for example,
We found that our proxy for an implied long-term researchers may define a universe of available
relationship had a coefficient with a positive sign ESG funds or use an ESG score in a regression
that is statistically significant. The model suggests model). We found ESG integration seemed
that, everything else being constant, a study with to perform better than negative screening
an implied long-term focus is 76% more likely and divesting, with 33% of the (N=17) studies
to find a positive or neutral result. Hang et al. finding alpha and 53% finding neutral or mixed
(2019) undertook a meta-analysis (N=142) which results. The subgroup of papers analyzing
found corporate investments in environmental pooled investment strategies (combining
sustainability had no effect on corporate financial everything with some type of ESG label) was
performance in the short term, but had positive least convincing in terms of showing a positive
effects over the longer-term. Some recent papers association (65% less likely). We speculate it
were optimistic about how markets value long- might be because too many different strategies
term commitments. Kotsantonis et al. (2019) found were combined together. For example, this
that CEOs communication of “long-term plans” group contains socially responsible investing
resulted in an abnormal positive reaction by the (SRI) and ethical funds that may not have an
stock market. A cross-sectional study on firms ambition to match or outperform a conventional
with strong ESG ratings found returns up to 3.8% benchmark. Ielasi et al. (2018) compared
higher per standard deviation of ESG score in the different sustainable investing strategies with
mid- and long-term (Dorfleitner et al., 2018). each other and indeed found performance
differences between passive and active and
2. ESG Integration as a strategy seems to perform ethical versus ESG integration strategies.
better than negative screening approaches
and ESG momentum may cause improvers to Very few studies emphasized material ESG
outperform leaders issues and demarcated between ESG Leaders,
The sample size of studies on specific portfolio or best-in-class firms, and ESG Improvers,
management strategies and asset classes was or firms showing the greatest improvement
small, making it challenging to interpret how they in their ESG footprint. One seminal paper
would translate into decision-making for an asset titled Corporate Sustainability: First Evidence
manager. The dominant research approach was on Materiality published in 2016 by Kahn,
to find a sample of sustainable funds or indices Serafeim and Yoon from Harvard Business
and compare them to a conventional benchmark. School showed the outperforming potential of
Most of the research focused on equities (N=54, mapping material ESG issues and emphasizing
with 33% finding alpha, 54% finding a neutral or momentum, or ESG improvement (Khan et al.,
mixed effect) rather than fixed income (N=11, with 2016). Rockefeller Asset Management’s research
19% finding alpha and 56% finding a neutral or further supports these results. In their paper,
mixed effect). In addition, most studies focused ESG Improvers: An Alpha Enhancing Factor,
on active (N=41, with 29% alpha and 56% neutral they use materiality mapping to differentiate
or mixed) vs passive (N=6) investing. between ESG Leaders and ESG Improvers, and
We also looked at the explicit or implicit demonstrate the alpha potential of the latter in
investment strategies that underpin the analysis a study covering US equities from 2010 – 2020.

7 ESG and Financial Performance

 The key takeaways from the research include: of ESG-focused funds outperformed their index
(Morningstar, 2020). While virtually all studies,
• A back-tested, hypothetical portfolio of top- by academics and practitioners alike found this
quintile ESG Improvers outperformed bottom- correlation, one outlier, based on ESG scores, did
quintile ESG “Decliners” by 3.8% annualized in not find such a correlation (Demers et al., 2020)
an analysis covering US all cap equities from
2010 – 2020. The signal is monotonic, in that 4. Sustainability initiatives at corporations appear
outperformance grew with each quintile. to drive financial performance due to factors
• An optimized hypothetical ESG Improvers such as improved risk management and more
portfolio, which seeks to isolate pure ESG innovation
improvement while controlling for sector and Sustainability strategies implemented at the
factor biases, generated 0.5% annualized corporate level can drive better financial
excess returns from 2010 – 2020 with 1.3% performance through mediating factors—i.e.
tracking error relative to the Bloomberg US the sustainability drivers of better financial
3000 Index. performance such as more innovation, higher
operational efficiency, better risk management,
• The ESG Improvers factor enhanced returns
and others, as defined in the Return on
when integrated with traditional factors
Sustainability Investment (ROSI) framework (Atz
over the back-test period. A hypothetical
et al., 2019). We reviewed the studies through the
multi-factor ESG Improvers + Quality + Low
lens of these mediating factors and found that
Volatility portfolio outperformed a two-
stakeholder relations, risk, operational efficiency,
factor Quality and Low Volatility portfolio by
and innovation were the most common in the
0.45% annualized. Over the same time period,
literature. For example, Vishwanathan et al.
an ESG Improvers + Value + Momentum
(2019) reviewed 344 studies and identified four
Portfolio outperformed a two-factor Value and
mediating factors – enhancing firm reputation,
Momentum portfolio by 1.1% annualized.
increasing stakeholder reciprocation, mitigating
firm risk, and strengthening innovation capacity –
3. ESG investing appears to provide downside which drove financial performance.
protection, especially during social or
economic crisis Our regression analysis reviewed 17 studies that
ESG investing appears to provide asymmetric included some aspect of innovation in their
benefits. As discussed below, investor studies analysis, and all had positive findings regarding
in particular seem to demonstrate a strong related financial performance. However, some
correlation between lower risk related to of these studies did not exclusively focus on
sustainability and better financial performance. innovation and so the individual effect is hard
Recent events have provided unique datasets to separate out. In addition, the small sample
for researchers. During the financial crisis size reduces the level of confidence; thus we see
(2007-2009) Fernández et al. (2019) found this as an exciting area for further research. For
that German green mutual funds delivered operational efficiency, more than half of the 22
risk-adjusted returns slightly better than their studies (59%) found a positive correlation between
peers (during non-crisis they were equal to operational efficiency and financial performance;
conventional funds, but better than SRI funds). only three of the 22 had a negative finding.
Similarly, the FTSE4Good, a set of ESG stock
market indices, performed better and recovered Regarding risk, we found that investor studies
its value quicker after the 2008 financial crash that did not include risk as a mediating factor
(Wu et al., 2017). These findings seem to hold in were only 27% likely to find a positive correlation
general for economic downturns as high rated with financial performance, while 48% of
ESG mutual funds outperformed low rated funds those studies that did include risk were likely
based on the Sharpe ratio (Chatterjee, 2018; Das to find a positive result. And 52% of the 40
et al., 2018). Finally, in the first quarter of 2020 studies across all studies looking at risk found
COVID downturn, 24 of 26 ESG index funds a positive correlation. For example, portfolios
outperformed their conventional counterparts, with lower ESG risks can maintain risk-adjusted
which they credited ESG leading to more performance (Hübel & Scholz, 2020). Gloßner
resiliency and at the end of the third quarter, 45% (2018) concluded that controversial firms with

8 ESG and Financial Performance

 a known history of ESG incidents exhibit “a implications of investing in companies producing
four-factor alpha of −3.5% per year, even when climate mitigation or adaption solutions,
controlling for other risk factors, industries, or which differs from decarbonizing portfolios.
firm characteristics.” In addition, with regards to This is a promising area of research. It seems
climate-change related risk, 51% of the studies likely that climate change will transform
found a positive correlation between better economies and markets through changing
financial performance and managing for physical regulations, changing consumption patterns,
and transition risk related to climate change. especially from next generation consumers,
and technological advancements. As a proof
Overall, no single mediating factor resulted in a point, FTSE’s Opportunities All Share Index - an
statistically significant effect in our model; partly index that includes companies with involvement
because the underlying samples are small and in Renewable & Alternative Energy, Energy
partly because the effects are hard to isolate Efficiency, Water Infrastructure and Technology,
in studies that mostly look very broadly at the Waste Management & Technologies, Pollution
relationship between sustainability and financial Control, Environmental Support Services, and
performance. More research is needed in this area. Food, Agriculture & Forestry – outperformed its
traditional counterpart, FTSE Global All Cap Index
5. Studies indicate that managing for a low carbon by 4.9% annualized over the five-year period from
future improves financial performance October 2015 – October 2020.
Research on mitigating climate change
through decarbonization strategies is fairly 6. ESG disclosure on its own does not drive
recent, but finds strong evidence for better financial performance
financial performance for both corporates and Just 26% of studies that focused on disclosure
investors. Unfortunately, none of the three elite alone found a positive correlation with financial
finance journals (Journal of Finance, Journal of performance compared to 53% for performance-
Financial Economics, and Review of Financial based ESG measures (e.g. assessing a firm’s
Studies) published a single article related to performance on issues such as greenhouse
climate change over their analysis period (Diaz- gas emission reductions). This result holds in
Rainey et al., 2017; Zhang et al., 2019), which a regression analysis that controls for several
we corroborated. However, 59 studies on the factors simultaneously. While what gets measured
relationship between low carbon strategies and does matter, measuring ESG metrics without an
financial performance were published elsewhere accompanying strategy seems ineffective. For
in the last five years, and the majority uncovered example, signatories to the UN Principles for
a positive result. Mitigating risk was the focus Responsible Investment agreed to implement
on many of the studies, as discussed earlier. For ESG policies, but the focus is on disclosure versus
example, Cheema-Fox et al. (2019) examined performance and Kim and Yoon (2020) found
the construction of decarbonization factors and that the signatories on average improved neither
found that different decarbonization strategies the ESG nor the financial performance of their
generate different risk-adjusted returns. In portfolios. In more general terms, Fatemi et al.
particular, they found strategies that lowered (2018) specifically distinguished between ESG
carbon emissions more aggressively performed disclosures and performance. While high (low)
better. In, Park, and Monk (2019) assessed 736 ESG performance increased (decreased) firm
US public firms from 2005 to 2015, and found value, they also found that ESG disclosures on
that a strategy of going long on carbon efficient their own had a negative valuation effect.
firms and shorting carbon inefficient firms could
earn an annual abnormal return of 3.5%-5.4%.
Their research indicates that investing in carbon-
efficient firms can be profitable even without
government incentives.
Few studies focused on the investment

9 ESG and Financial Performance

Conclusion

Our analysis of more than 1,000 research papers (firms showing the greatest improvement in their
exploring the linkage between ESG and financial ESG footprint). Finally, thematic studies are also
performance since 2015 points to a growing relatively limited although climate change studies
consensus that good corporate management of show promise; research shows a strong relationship
ESG issues typically results in improved operational between decarbonization strategies and improved
metrics such as ROE, ROA, or stock price. For performance.
investors seeking to construct portfolios that
generate alpha, some ESG strategies seem to Studies need to better distinguish between different
generate market rate or excess returns when types of investment strategies and asset classes in
compared to conventional investment strategies, order to analyze financial performance. Thematic
especially for long-term investors, and provide studies on material issues such as climate change
downside protection during economic or social crisis. provide an intriguing approach as focusing on one
Notably, very few studies found definitive negative issue may lead to more conclusive results. We also
correlations between ESG and financial performance. recommend that future meta-analyses distinguish
between corporate and investor studies as we have
Unfortunately, studies to help us understand why done. Finally, an area that has been woefully under
these correlations exist were lacking. There were researched is the causal factors for improved financial
very limited studies on mediating factors such as performance by corporates with robust sustainability
innovation and operational efficiencies that might strategies – we recommend more research into
drive better corporate performance. And most sustainability-driven innovation, employee relations,
investment studies did not clearly demarcate the supplier loyalty, customer demand, risk mitigation,
differing risk-reward outcomes of varying ESG operational efficiency, and so on.
integration approaches, nor did they analyze
the different performance implications of ESG We look forward to reviewing the field of the
leaders (best-in-class firms) versus ESG improvers research in 2025!

10 ESG and Financial Performance

Appendix:
Methodology

To understand differences in studies in a systematic manner, we disaggregated the research into three types:

1. Studies that analyzed how corporations with sustainability initiatives performed financially.
These studies typically used a panel of public companies, a commercially available ESG score or an
environmental/social performance metric, and may include mediating factors such as innovation,
operational efficiency, or risk management for a better understanding of how sustainability initiatives
lead to corporate financial performance (Vishwanathan et al., 2019). Here, we relied on our codebook
(Supplement 1) and investigated how innovation, operational efficiency, risk management and other
mediating factors were present in the academic literature.
2. Studies that analyzed how ESG funds, portfolios, or indices performed financially. Most investment-oriented
research on ESG and financial performance was at a portfolio level of an asset class using some metric of
risk-adjusted return, for example, comparing alpha in conventional and sustainable mutual funds. More recent
studies also looked at issues such as materiality (Khan et al., 2016) or investment management strategies such
as negative screening. Here, we analyzed the investor-focused research, which ESG investment strategies
were considered, and how the investor research compared to the corporate research.
3. Studies that analyzed a specific theme such as climate change, which can be relevant for managers and
investors. A third type of study focuses on a specific ESG theme. We chose climate change because it is a
new and growing area of financial risk for managers and investors that also presents opportunities. Here, we
gathered studies and industry reports and examined the role of climate change for asset managers.

We searched ProQuest, Web of Science (WoS), Google Scholar, Social Science Research Network (SSRN),
National Bureau of Economic Research (NBER), and other journal databases for two sets of keywords: related to
sustainability/ESG and related to financial performance/CFP. Examples of the search queries are shown in Table
A1 in the Appendix. We restricted the search for the period of January 2015 to February 2020 to find relevant
studies that were published in English. We used various validation strategies to achieve a comprehensive sample.

To develop the final sample (Figure 2), we screened (level 1) academic papers that examined the causal
relationship between sustainability and financial performance. The rapid title screening identified relevant
studies based on three quick heuristics that screened for results that we hoped generalize the most:

1. Is financial performance a dependent variable (outcome)?

2. Does a “sustainability variable” lead to a quantitative result?
3. Is there more than one company or fund being investigated?

In level 2 screening, we attempted to find the relevant section for the codebook (see Supplement 1) in the
full text such as definition of variables or a results table. The full set of eligible articles (1,141) was further
reduced, so that we could focus on coding studies for the quantitative synthesis. All quantitative meta-
analyses (n = 15) published in the reference frame were coded to achieve a dataset suitable for a second-
order meta-analysis (see Supplement 2 for details and data).

The median start and end date for an individual study’s data sample was 2007 to 2015. Many studies relied on
long time series with 27% having a mid-point year that was before the financial crisis of 2008. Nineteen percent
of studies used a sector-specific dataset. Geographically most studies focused on the USA (34%) and Europe
(24%) with a sizable share of global (29%) datasets. Over 30% of studies specified a specific country. For the
outcome variables we found that 18% analyzed ESG disclosures only and not ESG performance (and of those
40% used a third-party ESG score such as MSCI KLD). Market-based measures of financial performance (in 76%
of studies) were vastly more popular than accounting-based measures (27%) with some overlap.

11 ESG and Financial Performance

Appendix:
Summary Charts and Exhibits

The full study and supplement 1 and 2 are available on SSRN:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3708495

The NYU Stern Center for Sustainable Business (CSB) envisions a better world through better business.
CSB was founded on the principle that sustainable business is good business, and is proving the value of
sustainability for business management and performance at a time when people and the planet need it
most. Through education, research, and engagement, CSB prepares individuals and organizations with the
knowledge, skills, and tools needed to embed social and environmental sustainability into core business
strategy. In doing so, businesses reduce risk; create competitive advantage; develop innovative services,
products, and processes; while improving financial performance and creating value for society. For more
information, visit CSB’s website: https://www.stern.nyu.edu/sustainability

Table 1. Cross-tabulations for the mediating factor risk management and overall study finding. Note how investor studies
had fewer positive results (27% vs 48%) when the study did not consider risk.

Indicator variables Count Positive Neutral/mixed Negative

Mediating factor risk in corporate studies 16 57% 34% 8%
No mediating factor risk in corporate studies 143 69% 31% 0%
Mediating factor risk in investor studies 23 48% 39% 13%
No mediating factor risk in investor studies 63 27% 59% 14%
Mediating factor risk in thematic studies 13 69% 23% 8%
No mediating factor risk in thematic studies 46 54% 35% 11%
Notes. See Supplement 1: Codebook for all definitions.

Table 2. Selected codes for all studies across overall finding. Interpret rows with low counts with caution.

Indicator variables Count Positive Neutral/mixed Negative

Study design
Disclosure only 50 26% 60% 14%
Performance only 159 53% 39% 8%
Accounting-based measure 67 46% 42% 12%
Market-based measure 186 46% 44% 11%
Aggregate ESG score 48 52% 40% 8%
Casualty proxies
Implied long-term relationship 94 50% 40% 10%
Lagged dependent variable 51 51% 35% 14%
Fixed effects / matching methods / instrumental variables 66 41% 53% 6%
Mediating factors
Risk 40 52% 40% 8%
Operational efficiency 22 59% 27% 14%
Innovation 17 76% 24% 0%

12 ESG and Financial Performance

 Indicator variables Count Positive Neutral/mixed Negative
Social science theories
Stakeholder theory 80 57% 34% 9%
Legitimacy theory 40 45% 40% 15%
Porter’s hypothesis 40 57% 28% 15%
Resource-based view 64 55% 36% 9%
None 74 32% 57% 11%
Notes. See Supplement 1: Codebook for all definitions.

Table 3. Selected codes for studies of the investor type across overall finding. Interpret rows with low counts with caution.

Indicator variables Count Positive Neutral/mixed Negative

Asset class
Equities 54 33% 54% 13%
Fixed income 11 19% 56% 25%
Management style
Active 41 29% 56% 15%
Passive 6 50% 50% 0%
Portfolio management strategy
Negative screening & divesting 16 19% 69% 12%
Pooled strategies created by researchers 30 10% 73% 17%
ESG integration created by researchers 17 33% 53% 14%

Notes. See Supplement 1: Codebook for further details. Portfolio management strategy: Investors describe practical portfolio management
strategies in many ways, sometimes inconsistent. We broadly follow Matos (2020): “ESG and Responsible Institutional Investing Around the
World: A Critical Review from the CFA Institute Research Foundation.” Existing literature explores several ESG investing strategies in portfolio
management. Oftentimes the strategies are used interchangeably without clear distinctions. Negative screening & divesting is an investing
strategy where companies that do not comply with pre-established ESG principles are excluded from the portfolio. If the paper focuses on the
so-called “sin” industries alone, investing (or not) in the tobacco industry or staying away from oil and gas companies, it is coded as negative
screening, also. For an example see Richey (2016). Pooled strategies as created by researchers: Instead of excluding companies, investors
analyze and select firms and assets that exemplify sustainable business practices. If a paper compares ESG investing versus conventional
investing, such as comparing ESG mutual funds vs. conventional mutual funds, or SRI mutual funds versus conventional mutual funds, or ESG
index vs a benchmark conventional index, the strategy is coded as pooled strategies. For an example see Pereira et al. (2019). ESG integration
as created by researchers incorporates ESG analysis into fundamental research and portfolio construction beyond screening or pooled
strategies. We allowed for two subcodes in this category: ‘best-in-class’ and ‘improvers’. 1) If the paper specifically discusses “best-in-class” or
“improver”, then the paper is coded accordingly. The strategy is coded as best-in-class or improver when the strategy is the subject of study
in the paper, or the paper employs the strategy in portfolio construction. In this case, we code the paper accordingly. 2) If the paper does
not distinguish best-in-class and improver but rather using “ESG integration” as a generic strategy, then both strategies are selected. 3) If the
paper discusses ESG momentum strategy or the impact of ESG on momentum portfolios without distinguishing between best-in-class or
improvers, the strategy is coded as both (Kaiser & Welters, 2019; Yen et al., 2019).

Table 4. Selected codes for studies of the climate change issue type across overall finding.
Interpret rows with low counts with caution.

Indicator variables Count Positive Neutral/mixed Negative

Risk management
Physical risk 41 51% 39% 10%
Transitional risk 35 51% 40% 9%
Dynamic materiality / scenario 9 67% 11% 22%
Notes. See Supplement 1: Codebook for all definitions.

13 ESG and Financial Performance

Table 5. Ordered logit regression model for all studies

Dependent variable

Overall finding (negative, neutral/mixed, positive)

1 2 3 4 5

-0.976*** -1.103*** -0.882*** -0.992*** -1.129***

Investor perspective (vs corporate)
(0.263) (0.316) (0.346) (0.286) (0.381)

0.21 0.252 -0.006 0.153 0.09

Climate change issue (vs not)
(0.297) (0.31) (0.384) (0.304) (0.395)

-0.767** -0.751**
ESG disclosure (vs performance)
(0.347) (0.37)

-0.856*** -0.842**
Accounting-based (vs market)
(0.322) (0.331)

0.36 0.451
ESG score (vs E/S/G/other)
(0.36) (0.381)

Implied long-term relationship 0.381 0.568

(vs short term) (0.315) (0.327)

Lagged dependent variable -0.226 -0.54

(vs concurrent) (0.389) (0.412)

Fixed effects / matching -0.252 -0.262

methods / instrumental variables (0.342) (0.353)

-0.371 -0.214
No social science theory
(0.359) (0.388)

0.711* 0.536
Mediating factor: Risk
(0.394) (0.413)

-0.046 0.148
Mediating factor: Operational efficiency
(0.5) (0.539)

1.132* 1.212*
Mediating factor: Innovation
(0.678) (0.689)

Region controls? No Yes Yes Yes Yes

Observations 241 239 241 241 239

Notes. This table shows the result of an ordered logit regression model for all studies with five model specifications. The largest
statistically significant coefficient appeared from the investor indicator suggesting that the type of research is one of the main
explanatory variables for positive or negative results. Study design factors were important but proxies for causality or specific mediating
factors were not. The indicator variables for the three mediating factors are proxies and are based on few studies, and they should hence
be interpreted with caution. See Supplement 1: Codebook for the definitions of codes and variables. Standard errors in parentheses;
*p<0.1; **p<0.05; ***p<0.01.

14 ESG and Financial Performance

Table 6. Ordered logit regression model for investor-focused studies

Dependent variable

Overall finding (negative, neutral/mixed, positive)

1 2 3 4 5

0.534 0.356 0.289 0.591 0.206

Climate change issue (vs not)
(0.478) (0.546) (0.508) (0.502) (0.588)

-1.334** -1.120*
ESG disclosure (vs performance)
(0.568) (0.622)

0.144 0.154
Accounting-based (vs market)
(0.923) (0.965)

-0.082 -0.231
ESG score (vs E/S/G/other)
(0.594) (0.623)

-0.004 -0.028
Negative screening or divesting
(0.575) (0.597)

-1.146** -1.041
Pooled strategies
(0.523) (0.559)

0.865* 0.450
ESG integration
(0.520) (0.557)

0.075 0.451
Active management
(0.437) (0.484)

0.313 -0.083
Equities
(0.443) (0.486)

Observations 86 86 86 86 86

Notes. This table shows the result of an ordered logit regression model for investor-focused studies with five model specifications. The
smaller sample size suppressed the power of the statistical tests, but some coefficients were comparable in magnitude to the models in
Table 5. Coefficients for pooled strategies as defined by researchers were largest among portfolio management strategies suggesting
that papers that relied on that ESG portfolio management selection were more likely to find negative or neutral results. The difference
between the pooled strategies and ESG integration was statistically significant. See Supplement 1: Codebook for the definitions of codes
and variables. Standard errors in parentheses; *p<0.1; **p<0.05; ***p<0.01.

15 ESG and Financial Performance

Figure 4. Study selection based on the Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA)
guidelines. M = corporate/manager type; I = investor/asset manager type; CC = climate change; n = count

Records identified through Additional records identified

database searching through validation efforts
(M = 2416; I = 181; CC = 183) (M = 12; I = 13; CC = 41)
Identification

Records after duplicates

removed
(n = 2,714)

Records excluded
(n = 1,465)
Screening

Records screened
Level 1

(M = 2,359; I = 173; CC = 182)

Records labeled as
background papers
(n = 108)

Additional records identified Full-text articles screenend

through other sources and eligible
(n = 46) (n =1,141)
Screening
Level 2

Full-text articles de-prioritized Studies that are prioritized Studies included in qualitative
(year = 2015, 2016) and eligible synthesis (meta-analyses)
(n = 354) (M = 579; I = 103; CC = 105) (n = 27)
Inclusion

Balance filter for M only Studies included in Studies included in quantitative

(impact factor; stratification) quantitative synthesis synthesis (meta-analyses)
(n = 420) (M = 159; I = 86; CC = 59) (n = 15)

16 ESG and Financial Performance

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