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The Empirical Case for ESG Investing: A Guide for Social Entrepreneurs

Over the past few decades, the investing world has witnessed a transformative shift, with environmental, social, and governance (ESG) criteria becoming critical for investors. Understanding this shift is not just beneficial for social entrepreneurs; it's essential.


ESG logo on a green forest background

A comprehensive study(1) in 2015 analyzed the relationship between ESG criteria and corporate financial performance (CFP), tracing its roots back to the early 1970s. This research combined the findings of about 2,200 individual studies, providing the most exhaustive overview of academic research.


The findings of this seminal study are unequivocal: The business case for ESG investing is empirically very well founded. Approximately 90% of studies find a non-negative ESG–CFP relation, indicating that companies with strong ESG performance do not underperform financially compared to their less responsible peers.


But more importantly, the large majority of studies report positive findings. This means that not only does ESG investing not harm financial returns, but it can enhance them. This profound revelation can change the game for social entrepreneurs seeking funding.


The study also found that the positive ESG impact on CFP appears stable over time, suggesting that the benefits of ESG investing are not a passing trend but a durable dynamic likely to persist.


Furthermore, promising results were obtained when differentiating between portfolio and non-portfolio studies, regions, and young asset classes for ESG investing, such as emerging markets, corporate bonds, and green real estate. This indicates that the benefits of ESG investing are widespread and can be reaped in various types of investments and markets.


For social entrepreneurs, these findings underscore the importance of integrating ESG principles into their business models. As more investors recognize the financial benefits of ESG investing, social entrepreneurs demonstrating strong ESG performance may find it easier to attract funding. Furthermore, by aligning their businesses with ESG criteria, social entrepreneurs can contribute to societal and environmental well-being while enhancing their financial performance.


You can learn more about how to be Impact Investor ready by completing our online course: How to become Impact Investor ready.


In conclusion, the world is waking up to the power of ESG investing. For social entrepreneurs, this presents an opportunity to drive change and create value for their stakeholders, society, and the planet.


Footnotes

1. Friede, G., Busch, T., & Bassen, A. (2015). ESG and financial performance: Aggregated evidence from more than 2000 empirical studies. Journal of Sustainable Finance & Investment, 5(4), 210-233. https://www.tandfonline.com/doi/epdf/10.1080/20430795.2015.1118917?needAccess=true&role=button


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