The Correlation Between Corporate Governance and Social Responsibility

Nicholas J Price
5 min read

ESG investing is the new kid on the block, and the new kid is becoming popular fast. ESG indexes assess companies based on environmental, social and governance policies. ESG companies are also known as ethical, green, sustainable or socially responsible companies.

ESG investing is an investment strategy that takes social and environmental concerns, along with financial returns, into account when making investment decisions. Financial experts have started a viral conversation about how ESG companies lead to better returns and lower risks. Part of the popularity of ESG investing stems from generational changes and a societal focus on values.

The New Trend Toward Corporate Governance and Social Investing

In the past, investors only analyzed financial ratings. Today, many investors are looking at a combination of strong returns and ESG ratings. Before ESG indexes emerged, investors that were interested in companies that held deep social and environmental values had to rely on the reputations of companies and those that promoted themselves as being sustainable or socially responsible.

ESG ratings have given investors a more objective look at corporations. At the same time, ESG ratings give investors more socially responsible companies from which to choose.

Investors Jason Teed and Ron Rowland, from Invest With An Edge, state, 'Taking a long-term, sustainable view ensures that a company can operate in perpetuity.' They add, 'Going forward, it would appear that the appetite for these types of products will only increase.'

What Does Impact Investing Have to Do With Corporate Governance and Social Responsibility?

Impact investing is a new subset of ESG. Investors define it as the conscious creation of social impact through investment. Essentially, impact investing means that corporations actively engage with corporations that they invest in, working together with them to help them do better.

Impact investing can take several different forms, depending on an investor's taste, values and other preferences. Personal morals typically guide ethical investing. This type of investing may veer away from companies that involve guns, tobacco, gambling or other controversial issues.

In some cases, if corporations meet their investors' rigorous standards, they can expect investors to allocate a higher percentage of investment. Socially responsible investing is also called SRI. SRI focuses more on the business processes, culture and practices, rather than a company's products. Thematic investing is another type of investing that picks a certain theme to work for, such as green products and green living.

Impact investing has enjoyed a great many successes. The philosophy is a win for corporations and investors, as well as a win for society.

What Do Statistics Say About Corporate Governance and Social Responsibility?

Studies have been conducted that show that ESG factors have strong connections to good ratings and financial performance over the short- and long-term. A Harvard Business Review study reported that ESG companies had higher profitability and stock performance than non-ESG corporations.

Deutsche Bank compiled an analysis of over 2,000 companies as far back as the 1970s and found that ESG investing yielded superior returns in about 90% of the studies.

Examples of Diversified Stock Funds That Have Strong Returns and ESG Ratings

Index owners have taken notice of the vast interest in ESG investing. They've come up with indices that list corporations that have strong financial returns combined with strong ESG benchmarks. A review of three ESG funds gives a better understanding of how well corporate governance and social responsibility complement each other.

Calvert International Opportunities

Calvert International Opportunities is one of those funds that self-identifies as a sustainable fund. This fund tends to focus on undervalued small-cap and mid-cap foreign stocks that also have good ESG qualities. The fund has recently been performing quite well. Calvert is an impact investor that works eagerly with its companies to help them improve.

Parnassus Endeavor

Parnassus Endeavor bills itself as a fossil fuel-free fund. Part of its mission is to invest responsibly. This fund is an impact investor that supports companies that provide great places for employees to work. The fund votes on shareholder resolutions to help companies move forward. With stocks up 27% for the 12 months prior, Parnassus Endeavor shows excellent results.

Oakmark International

Oakmark International has made a name for itself as an ESG, although it doesn't promote itself that way. This fund has a strong portfolio of mid-cap and large-cap foreign stocks. Its strategy is to buy undervalued businesses that are managed to the benefit of shareholders. Like the other funds, Oakmark International has shown recent good returns. It's up 36% for the year ended at the close of July 2017.

What's the Millennial View of the Intersection of Corporate Governance and Social Responsibility?

The SerenityShares IMPACT ETF launched in 2007. This fund focuses on ESG investments. SerenityShares IMPACT is a popular fund with millennials. Bloomberg reports that about 84% of millennials are interested in ESGs. Financial experts predict that millennials won't flip on their perspective as they get older. This theory coincides with the belief of Teed and Rowland that the demand for sustainable products and socially responsible corporations will only increase as time goes on. This also makes sense when you consider many of the common characteristics of the millennial generation. Millennials are well-educated and technologically savvy. They tend to be community-minded and socially invested at the local, state, national and global level. Millennials as a group tend to have a strong moral compass and an entrepreneurial spirit, which coincides nicely with the principles behind ESG.

Concluding Thoughts on Corporate Governance and Social Responsibility

There's no question that there's a strong connection between corporate governance and social responsibility. There's also no question that it's an amiable and successful relationship. Corporate governance, when combined with social responsibility, is trending well enough to help boost the global economy. Ultimately, that makes for a nice world all around. It could be that the global economy is well-positioned, as millennials are slated to outnumber Baby Boomers as early as 2019.

One way that companies can demonstrate their commitment to sustainable, green and socially conscious business practices is by using electronic board management systems and the suite of software solutions that comprise Governance Cloud. Investors will appreciate knowing that companies make a full commitment to socially responsible business practices.