Corporate Governance, ESG, and Stock Returns around the World

Disclaimer: The author is employed by an investment management firm that invests in public equities globally. Important Disclosures: These materials should not be relied on as research or investment advice regarding any stock. There is no guarantee that any forecasts made will come to pass. Causeway Capital Management LLC does not guarantee the accuracy, adequacy, or completeness of such information. Although the author?s information providers, including without limitation MSCI ESG Research LLC and its affiliates (the ?ESG Parties?), obtain information from sources they consider reliable, none of the ESG Parties warrants or guarantees the originality, accuracy, and/or completeness of any data herein. None of the ESG Parties makes any express or implied warranties of any kind, and the ESG Parties hereby expressly disclaim all warranties of merchantability and fitness for a particular purpose, with respect to any data herein. None of the ESG Parties shall have any liability for any errors or omissions in connection with any data herein. Further, without limiting any of the foregoing, in no event shall any of the ESG Parties have any liability for any direct, indirect, special, punitive, consequential, or any other damages (including lost profits) even if notified of the possibility of such damages. Editor?s note Submitted 18 June 2019 Accepted 30 July 2019 by Stephen J. Brown 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.