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Despite being championed by activists as good for business, high ESG scores have no bearing on companies’ stock market returns, a new study finds.

A study by the Fraser Institute found no positive correlation between Canadian companies with high ESG ratings and their overall market performance.

ESG ratings take into account how a company runs in relation to environmental, social, and governance issues.

The environmental rating refers to a company’s commitment to climate action. The social rating relates to metrics such as what demographics the company hires and how it pays those employees. Governance is about how the company is run.

ESG ranking companies measure several factors along those three dimensions, aggregate the data, and give businesses an overall rating. According to the study, business leaders and government officials alike often advertise these rankings as something investors care about.

“We looked at the relationship between the change in the ESG rating across our sample of companies and the stock performance, which includes dividend payments and any stock splits over the next up to 12 months beyond the rating change…and there’s no statistically significant relationship,” study author Steven Globerman said on True North’s Andrew Lawton Show on Tuesday.

Because of government securities regulations, publicly traded companies in Canada must disclose their ESG-related information so everyone can know if they are fulfilling their commitments to environmental impact, human rights, and “equity and inclusion.”

The study tracked 310 companies on the Toronto Stock Exchange from 2013 to 2022.

It was the first empirical analysis of the relationship between the changes in ESG rankings of publicly traded companies in Canada and the price of shares and dividend income in those companies, although similar studies on American companies have revealed the same trend, Globerman said.

Globerman said it’s useful to analyze the change in the price of stock market returns because it reflects what millions of investors think about the future profitability of a publicly traded company.

He said there was no clear correlation between the ESG rankings and the profitability of those companies on the Canadian stock market. 

Because there were no trends in relation to that data, any changes could have been attributed to other factors, such as luck. 

“Advocates for greater ESG disclosures cannot accurately claim, based on Canadian evidence, that requiring companies to provide more information for ESG rankings will significantly affect the financial performance of Canadian investors,” he said.

According to Globerman, companies pay out of pocket for ESG rating companies to rank their organizations in terms of their sustainability performance, and use those ratings to promote how progressive their companies are.

In the report, Globerman questioned why investment managers would continue to pay for these ratings if they have no connection to investment performance. 

The report said the extra administrative cost that would be needed to pay for ESG-themed investments is likely to be passed on to the customers of those firms.

“It raises an obvious question: why are people investing in ESG-themed mutual funds? They’re paying higher fees to invest in those funds. They don’t appear to be getting the net returns that people are getting who are investing in conventional asset categories,” Globerman said.

He said it’s likely that people are investing out of goodwill as there aren’t any clear financial benefits. In fact, he said, there is a cost because the costs of ESG ratings are passed on to customers by investment managers.,

“The more relevant version of the question is why customers are willing to pay higher administrative fees for ESG-themed investments when they would earn similar gross returns, and therefore higher net returns if they invested in non-ESG themed alternatives,” he said.

“If people continue to want to get psychic benefits or more glow feelings from how they’re investing. That’s their business, but they should be informed about what the expected returns were.”