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ESG Correlates Positively with Improving Long-Term Returns – NYU Stern Meta-Study

Separate PGIM report says minority of investors currently integrating climate risk into investment process.

Incorporating ESG themes and targets into investment strategies strongly correlates with higher long-term financial returns, according to a new meta-analysis of over 1,000 studies conducted during 2015-2020.

However, common problem areas hindering ESG integration included shortcomings in data, inconsistent terminology and an “inconsistent emphasis on material ESG issues”, according to researchers at New York University Stern School of Business’s Center for Sustainable Business.

“We’ve seen an exponential increase in ESG and impact investing as evidence builds that business strategy focused on material ESG issues goes hand-in-hand with high-quality management teams and improved returns,” said founding director Professor Tensie Whelan.

Within the survey of 1,141 peer-reviewed papers and 27 meta-reviews, the university highlighted that, as well as benefitting from better financial performance in the longer-term, ESG integration within investments strategies is more effective than using negative screening and protects from downside risk in a crisis. However, simply making ESG-related disclosures without implementing an accompanying ESG strategy doesn’t drive financial performance as effectively, the report said.

In a separate survey, PGIM, the investment management business of Prudential Financial, noted the shortcomings in ESG data integration. “Not enough investors use alternative data sources and techniques to better understand cross-portfolio climate risk,” PGIM said.

The report noted that fewer than one in five investors use alternative climate-related data in their cross-portfolio analysis. This is despite the fact that nearly 90% of global investors said climate change is “very or somewhat important”.

Of the global investors surveyed, 40% said they have yet to incorporate management of climate risk into their investment process.

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