Impact Management | January 11, 2022

Long-term investors cotton to firms scoring high on ESG, and vice versa

David Bank
ImpactAlpha Editor

David Bank

ImpactAlpha, Jan. 11 – It makes sense that pension funds with long time horizons would gravitate to portfolio companies that take seriously the environmental, social and governance factors that drive long-term performance. Now there’s empirical research to support that thesis.

The winners of this year’s Moscovitz Prize, awarded by Northwestern’s Kellogg School of Management for studies into the dynamics and impact of sustainable investing, showed that the portfolios of investors with longer gaps between buying and selling have a higher proportion of holdings in firms with higher ESG scores than do the portfolios of shorter-term investors.

  • Long-term horizons. In “Corporate ESG Profiles and Investor Horizons,” prize-winning authors, Laura Starks of the McCombs School at the University of Texas, Parth Venkat of Alabama’s Culverhouse School of Business and and Qifei Zhu of the Nanyang Business School, also showed that ‘high ESG’ firms have more long-term investors as shareholders. Moreover, those long-term investors are sticky: they are less likely to sell a high-ESG firm than a low-ESG firm when shares or earnings fall.
  • Virtuous cycle. “The implication for firm management is that if you have better ESG, you’re going to be more attractive to long-term investors,” says Starks, a longtime mentor for academic researchers in sustainable finance. “So to get these investors you should improve your ESG, which is good for society overall.” Added Kellogg’s Lloyd Kurtz, who originated the Moscovitz Prize 25 years ago while at Wells Fargo and helped judge this year’s entries, “The idea is that if markets are myopic and fixated on one- and two-year performance, they might be getting the long-term picture wrong and there might be opportunity for long-term investors to profit.”