New EDHECinfra research finds no financial penalty or gain for infrastructure firms in implementing ESG management and reporting.

It makes no difference – either way

A new paper drawn from the EDHECinfra/LTIIA Research Chair shows that Environmental, Social and Governance (ESG) scores show neither negative nor positive correlation with the financial performance of unlisted infrastructure firms when based on Return on Assets.

This initial study bears the title ESG Reporting and Financial Performance: the Case of Infrastructure. It represents the first research insights into the link between returns and ESG in unlisted infrastructure.

The study cross-references two unique databases. First are the ESG scores computed by GRESB Infrastructure since 2016 while the second are the financial metrics of the EDHECinfra universe. It shows that, after taking traditional factors into account, ESG ratings do not significantly drive returns or profits.

ESG not a risk factor after all

“ESG is not a risk factor in infrastructure investment,” says Tim Whittaker, Research Director at EDHECinfra, who is also co-author of the paper. “This paper challenges the oft-reported notion that better ESG ratings should somehow systematically increase or decrease returns.

Silvia Garcia, Senior Analyst at EDHECinfra and co-author adds: “We do not find negative correlations between returns or profits and ESG ratings either, suggesting that implementing ESG does not harm financial performance.”

Thierry Déau, Chairman of LTIIA says: “Infrastructure investors increasingly identify ESG as a first order problem, beyond expected returns. Choosing better ESG is also a way to select better individual assets. In a world where diversification is limited, this remains highly relevant.”

The analysis matches 2016-18 GRESB data for 173 firms with financial performance data from EDHECinfra’s universe of investible companies. Our infrastructure databases, which we constantly update and expand, cover 25 major markets worldwide. While controlling for other factors, it uses statistical tests to seek relationships between GRESB Scores and returns or profits.

Answering investors’ questions

Rick Walters, Director of GRESB Infrastructure explains. “This is the first generation of this research. It helps us refine our understanding of why ESG matters and how ESG data collection will continue to evolve to answer investors’ questions in the future. The ESG scores used in the study measure the management approach and transparency of performance reporting. They highlight the need for more direct measures of such performance.”

Future research will aim to use longer time series, as well as introduce additional performance measures and utilise direct measures of ESG impact.