Corporate governance in Asia generates higher returns

Corporate governance in Asia generates higher returns

03-07-2015 | Press release

Hong Kong, 03 July 2015 –Global asset manager Robeco recently collaborated with a team of students from the Hong Kong University of Science and Technology’s Business School (the HKUST Business School) to complete a study on “The Role of Governance relative to Environmental and Social Factors in Equity Returns”. The study found that Asian equity investors can capture better returns and lower portfolio risk by considering Environmental, Social and Governance (ESG) factors, specifically the governance factor.

The team is under the supervision of Professor Entela Benz from the Department of Finance at the HKUST Business School, and she said, “Among the three factors, we found that an improvement in corporate governance factors in Asian equities improves their risk/return profile. This indicates a meaningful market inefficiency and the fact that this effect is only manifested after two years also means that market participants in Asia are not considering corporate governance as a material factor when investing in stocks.”

The team conducted a series of correlation and causality tests on 1,375 public companies across Asia, Europe and North America, investigating how ESG factors impact stock prices and volatility using RobecoSAM’s Corporate Sustainability Assessment Scores (as proxies for ESG performance) and concluded that:

While there is a high degree of correlation between Environment, Social and Governance factors, causality analysis reveals that improvements in the Environment factor will eventually lead to improvements in Social and ultimately also Governance factors. However, in Asia the causality is much weaker as improvements in Environment only caused changes in the Social, but not in the Governance factor.

However, relative to other regions, the Governance factor is very important in Asia. An increase in the Governance factor in Asia improves the risk/return profile of the companies; in generating higher return while simultaneously reducing risk. The negative relationship between Governance and volatility seems less significant for other regions in the world, implying that markets outside Asia already price in good corporate governance.

Investing in the top 10% of companies (by ESG scores) leads to higher dividend payout ratios and lower risk than the bottom 10% of ESG performers. Selecting the top 10% of companies generates a statistically significant higher dividend payout ratio. In addition, the same strategy for the universe of Asian companies would have provided a portfolio with significantly lower portfolio risk.

Arnout van Rijn, Chief Investment Officer, Robeco Asia Pacific said, “This is Robeco’s first research collaboration with an Asian university, and their findings further confirmed our approach to sustainability investing. This type of study is important as changes in regulations and the greater availability of ESG information has led to an increased interest among institutional asset owners in sustainable investing. It suggests active investors prepared to invest longer term in companies with good or improving governance are potentially able to capture better risk-adjusted returns.”

NOTE TO EDITOR:
Responsible or sustainable investing has typically involved three main approaches: Exclusions, engagement and integration. Exclusions involve “norms-based” screening out of controversial companies, engagement involves dialogue with investee companies to improve performance on Environmental, Social and Governance (“ESG”) criteria, and integration includes a process of assessing how quantitative and qualitative ESG factors impact investment decisions.

ESG integration refers to the analysis of financially material ESG factors (positive and negative), that may affect investment decisions. Robeco believes that taking ESG criteria into account results in better-informed investment decisions and is necessary to fully grasp the risks and opportunities that are associated with the businesses in which we invest. In its most fundamental sense, integration thus involves the adjustment of financial model assumptions based on the sustainability performance of a company.

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