Better company environmental, social, and governance (ESG) performance improves economic growth

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New research from the Smith School of Enterprise and the Environment, University of Oxford, finds that private sector companies' environmental, social, and governance (ESG) practices positively affect macroeconomic performance including GDP.

In a working paper, Oxford Sustainable Finance Programme researchers Xiaoyu Zhou, Ben Caldecott, and Elizabeth Harnett perform the first empirical study to examine the effect of firm-level ESG practices on macroeconomic performance across both developed and emerging economies.

Key findings include:

  • Across the sample group, an increase of firms' ESG performance in a country is associated with a positive, statistically significant effect on living standards in that country, as measured by GDP per capita.
  • Firms' average social performance has a statistically significant positive effect on growth in GDP per capita in both developed and emerging economies.
  • Environmental and governance performance has a statistically significant positive effect for growth in GDP per capita in emerging economies.

The key overarching result of the research is that a one-unit increase in firms' average E, S, or G score at the country-level is associated with 0.06%, 0.10%, and 0.19% increases in the log of GDP per capita, respectively. As a concrete example, the results predict that if the worst firms on environmental performance (those of Indonesia, with an average score of 43.5) matched the highest performers in France (average score 71.8), this would be associated with a 15% increase in Indonesian GDP per capita, from around US$4,300 to just over US$4,900.

Dr Ben Caldecott, Director of the Oxford Sustainable Finance Programme and a co-author said, "This research will be of particular interest to economic policymakers as well as central banks. Policymakers should encourage the adoption of ESG practices by companies as such efforts can enhance long-run macroeconomic performance.

"Our finding that firm-level social performance is positively associated with GDP per capita is notable in light of the ongoing Covid-19 pandemic. Our research suggests that if some of the pandemic recovery efforts were directed at enhancing companies' ESG, and especially social performance, this could stimulate economic growth."

Dr Xiaoyu Zhou, Lead for Sustainable Investment Performance at Oxford Sustainable Finance Programme and lead author said, "The research results refute the notion that active integration of environmental or social policies into corporate decision-making will lower GDP growth, and make a compelling case to industry stakeholders, investors, and policymakers that ESG policy implementation across the corporate sector will generate macroeconomic benefits."

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