Do Corporate Sustainability and Sustainable Finance Generate Better Financial Performance? A Review and Meta-analysis

Sustainability in business and ESG in finance has entered the mainstream and has generated thousands of research articles that analyze its correlation with financial performance. We surveyed 1,141 primary peer-reviewed papers and 27 meta-reviews (based on ~1,400 underlying studies) published between 2015 and 2020. We reviewed three types of studies: corporate, investor, and thematic (e.g., climate change). An ordinal choice regression model showed that the type of study explains the inconsistent conclusions in prior reviews regarding whether it “pays to be good.” Our data demonstrates that higher ESG is associated with better financial performance in corporate-focused studies (58% ± 7 of studies were positive). Investor-focused studies find that ESG investing is comparable or preferable to conventional investing in 86% ± 6 of studies (with one in three studies indicating superior performance). Thematic studies were rarely represented in top finance journals, but capture aspects missed by other sustainability research. We found evidence that positive results dominate for recent climate change studies (N=59): 87% and 94% of investor- and corporate-focused studies, respectively, showed neutral/mixed to positive interpretations regarding financial performance. We also employed a Bayesian random effects model to summarize 15 recent, quantitative meta-analyses (covering studies between 1976 and 2018), which estimated a partial correlation coefficient between ESG and financial performance of 0.05 to 0.13. We conclude with six propositions. Some are practical: ESG integration as a strategy appears to perform better than screening or divestment. Others are timely: ESG investing can provide benefits during a social or economic crisis.