Bridge over ocean
1 October 2019 Financial Analysts Journal Volume 75, Issue 4

Corporate Governance, ESG, and Stock Returns around the World

  1. Mozaffar Khan

Applying “materiality” to ESG ratings improves their accuracy for forecasting returns. Global governance scores are enhanced by incorporating variability in ownership structure, shareholder orientation, and institutional settings around the world.

Nonfinancial performance measures, such as environmental, social, and governance (ESG) measures, are potentially leading indicators of companies’ financial performance. In the study reported here, I drew on prior academic literature and the concept of ESG materiality to develop new corporate governance and ESG metrics. The new metrics predicted stock returns in a global investable universe over the tested period, which suggests potential investment value in the ESG signals.
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