Many believe that choosing investments based on environmental, social, and governance (ESG) criteria comes with better returns or lower risk. A recent study looked closely at that idea — for Canadian public companies — and here’s what it found.
What the Study Did
- Examined around 310 companies listed on the Toronto Stock Exchange over 2013-2022.
- Used ratings from a major ESG-rating provider to track changes in ESG scores (upgrades or downgrades), then compared those changes to how the companies’ stock prices and dividends performed.
- Wanted to test whether higher ESG ratings (or improvements) translate into financial outperformance, or whether worsening ESG ratings lead to underperformance.
Key Findings
- Upgrades and downgrades in ESG ratings did not show a statistically significant link to better (or worse) financial returns.
- In short: doing “better ESG” doesn’t reliably mean you’ll make more money (or lose less). The data didn’t support a strong reward for higher ESG scores, at least over that period and for those companies.
- There’s also no strong evidence that poor ESG ratings reliably predict worse performance. The relationships are weak or inconsistent.
What This Means for Investors / Companies
- ESG doesn’t guarantee financial gains. Investors who pick ESG-friendly firms should understand that it might not bump up returns.
- Some push for ESG investing may be driven more by values, ethics, or risk-management, rather than purely financial performance. That’s okay — but expectations should be realistic.
- Higher fees or costs associated with ESG-themed funds might reduce net returns if ESG doesn’t deliver above-average performance.
- Companies wanting to improve their ESG rating should still do so — but not with the promise it will automatically boost stock price or dividends. It may help with risk, reputation, stakeholder trust, regulatory compliance, etc.
What to Be Careful About
- ESG rating systems differ a lot. What one provider scores as “good ESG” could be seen differently by another. So comparisons and claims need to be taken with scrutiny.
- Time horizons matter. Maybe ESG pays off in the long run, or during specific conditions (e.g. regulatory change, climate risk events). But this study didn’t find consistent evidence in the mid-term for the sample it used.
- Other benefits of ESG (non-financial) may still be real: brand value, customer loyalty, resilience, risk mitigation. Financial return is only one dimension.
Bottom Line
The evidence suggests that in Canada, ESG investing isn’t a silver bullet for financial outperformance. It’s not that it’s bad, but the data doesn’t show it reliably leads to higher returns.
For both investors and companies: ESG matters — but as one part of strategy, not as a guarantee of profit. The value may be more about stability, ethics, long-term risk, and reputation than short-term gains.
