Executive Summary

From “How” to “Where” — For many investors, the conversation has shifted from how ESG matters (i.e., performance) to where it matters. When ESG matters to an investment factor, that can have material implications for stock selection criteria.

A Widespread Interaction Between ESG and Investment Factors — A relationship exists between ESG and a multitude of investment factors, including country classification, market capitalization, and various valuation metrics.

ESG Adds Value in Certain Geographies — Because of wide divergences in the quality of corporate governance in emerging markets, ESG-based stock selection can add significant value. In developed markets, ESG-based stock selection has added more value in Europe than in the US.

High ESG Risk Sectors can be Associated with Certain Factors — Some sectors have greater ESG risks than others. “Value” managers investing in sectors with low price to book multiples may unknowingly overweight areas where ESG risks are relatively high, e.g. Materials, Energy.

Figure 1: At the Intersection: ESG and Investment Factorsfactors venn

Source: Cornerstone Capital Group

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Michael Geraghty is the Global Markets Strategist for Cornerstone Capital Group. He has over three decades of experience in the financial services industry including working as an investment strategist at UBS and Citi.