The Corner


ESG and Share-Price Performance

Notepad kept on table in empty conference room (Getty Images)

I haven’t read the underlying paper (so all necessary caveats apply) from 2019, but, if this INFORMS report of its contents is accurate, it is of interest both as a reminder of the importance of investor perception in shaping a company’s market price (something that is both obvious and yet something that some “fundamental” investors can overlook), and for the awkward questions that it implicitly asks about “socially responsible” (to use that preening, self-regarding label) investing.

INFORMS (my emphasis added):

A company with a gender-diverse board of directors is interpreted as revealing a preference for diversity and a weaker commitment to shareholder value, according to new research in the INFORMS journal Organization Science.

The study examines investor responses to board diversity and finds that one additional woman on the board results in a 2.3% decrease in the company’s market value on average, which could amount to hundreds of millions of dollars.

Authors Isabelle Solal and Kaisa Snellman, both of INSEAD, looked at 14 years of panel data from U.S. public firms and saw that firms with more female directors were penalized.

“Firms that increase board diversity suffer a decrease in market value and the effect is amplified for firms that have received higher ratings for their diversity practices across the organization,” said Solal.

The paper, “Women Don’t Mean Business? Gender Penalty in Board Composition,” suggests that investors respond to the presence of female leaders not simply on their own merit, but as broader cues of firm preferences.

“If investors believe that female board members have been appointed to satisfy a preference for diversity, then by increasing board diversity, a firm unintentionally signals a weaker commitment to shareholder value than a firm with a nondiverse board,” said Snellman.

Some reports by consulting firms and financial institutions have shown a positive correlation between firm value and gender-diverse boards, but recent studies based on long-term data show a negative effect on female board representation. The explanation is found in how investors interpret the decision.

Put another way, investors are not marking the price of a company down because of higher female board representation per se, but because of their suspicion that it is evidence that the company is prioritizing a “socially responsible” agenda above shareholder return. Such hirings are seen, to borrow the phrase used above, as a “broader cue of firm preferences.”


The paper suggests that over time, just as greater exposure to female leaders has been shown to reduce stereotype bias, the increase in female board appointments should likewise decrease the perception that firms select directors for any reason other than their qualifications.

I am sure that’s the case. Experience will dispel prejudice.

But then let’s take a look at other aspects of what is now expected of a “socially responsible” company, often a series of tests designed to see how it measures up various against various (and varying) “Environmental, Social and Governance” (ESG) standards. What evidence there is suggests that the relatively uncontroversial ‘G’ (Governance) adds, as might be expected, to share price performance, the ‘S’ and the ‘E,’ not so much.

To reiterate some research I cited in a post from late May, which comes from Julian Morris, writing in IFC Review:

 A 2016 paper from group of researchers from the European Parliament and Bournemouth Business School sought to look more deeply at the relationship, using disaggregated data from Bloomberg’s ESG Disclosure form for the S&P 500 for the period 2007 to 2011. The researchers found that the relationship between ESG and financial performance in general was indeed U-shaped. However, they found that the environmental and social components were linearly negatively related to performance. It was only the governance component that drove the U-shape relationship. This governance-dominated U-shape relationship between ESG and financial performance has since been confirmed in other studies.

Even if we put that to one side, there is some evidence that the outperformance of some ESG investment funds might reflect nothing more than investor demand for tech companies that happen to be (environmentally speaking) ‘light touch.’

In a post, again from May, I quoted Bloomberg’s John Authers:

Vincent Deluard, of INTL FCStone Inc., suggests that ESG funds are people-unfriendly. Tech and pharma companies tend to look good by ESG criteria, but they tend to be virtual as well as virtuous. These are the kind of companies that need relatively few workers and which churn out hefty profit margins. When Deluard looked at how the big ETFs’ portfolios varied from the Russell 3000, the results were spectacular. They are full of very profitable companies with very few employees. . . . A further look at companies’ market cap per employee showed that investing in the current stock market darlings who are making their shareholders rich is a very inefficient way to invest in boosting employment. They include hot names like Netflix Inc., Nvidia Corp., MasterCard Inc. and Facebook Inc…. Companies with few buildings, few formal employees and a light carbon footprint tend to show up well on ESG screens.

In other words, the reasons that these stock-market favorites score well (in ESG terms) is not a result of a conscious decision to adopt, say, a climate agenda, but because of the underlying nature of their business.

Returning then to the question of female directors, the more that investors can see that the appointment of women to the board is a boon to the bottom line, then the more that this particular issue can be separated from the issue of “socially responsible” behavior and looked at instead as a matter of employing the best person for the job, something to which no rational investor ought to object.

However, if the broader implications of this research, which is that investors do not like to see companies adopt “socially responsible” policies at the expense of the bottom line, are thought through, that raises serious questions about whether companies or investment groups investing client money who consciously adopt (or insist upon) such policies may (in the absence of a specific investor or shareholder mandate) be in breach of the duty they owe to those who have entrusted their money to them.


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