Will,

Does ESG Boost Returns?

I would like to believe that positive Environmental Social and Governance (ESG) factors lead to a "sustainability premium." Likewise, I also want to believe that economic freedom leads to higher growth. (Click here for the 2016 ranking of countries from the Heritage Foundation: http://www.heritage.org/index/

Unfortunately, research cited by Larry Swedroe suggests that investors will not earn a premium by investing in companies that rank high for sustainability, or other forms of ESG. http://thebamalliance.com/blog/sustainable-investing-and-mutual-fund-pe…

Why?

I suspect two things:
1) Market efficiency--investors bid up valuations for firms with high sustainability rankings. This diminishes future returns.
2) Self-selection: I believe that successful companies are much more likely to embrace sustainability. If your firm has a high ROE and moderate growth, you want to preserve the franchise.

This is just speculation on my part; I don't have data to back it up.

However, your point remains valid: ESG may improve corporate financial performance, as noted in the study you cited (Friede, et al.). So corporate performance may benefit from ESG, even though investors may not realize higher returns.

Regarding your final point, how do we get companies to think in terms of 20-year horizons? Off the top of my head I suggest:
1) Long-term compensation for CEOs
2) Financial reporting that consistently connects effort the company's quarterly performance to its long-term vision.
3) Excitement! People will stick to a long-term plan if you get them excited about an idea.

Thanks for the discusssion.
Rob