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Applying “materiality” to ESG ratings improves their accuracy for forecasting returns. Global governance scores are enhanced by incorporating variability in ownership structure, shareholder orientation, and institutional settings around the world.


Overview

Nonfinancial performance measures, such as environmental, social, and governance (ESG) measures, are potentially leading indicators of companies’ financial performance. In the study reported here, I drew on prior academic literature and the concept of ESG materiality to develop new corporate governance and ESG metrics. The new metrics predicted stock returns in a global investable universe over the tested period, which suggests potential investment value in the ESG signals.

About the Author(s)

Mozaffar Khan

Mozaffar Khan is senior quantitative research analyst at Causeway Capital Management LLC, Los Angeles, California.