• The study analysed companies' ESG scores and financial performance, as well as factored in specific ESG indicators.
• Diversity factors show a positive effect on company value.
• GPIF will monitor its sustainable investments and, if necessary, will adjust its investment approach to increase returns.

The Japanese government's Government Pension Investment Fund (GPIF) has published a new report that analyses how environmental, social, and governance (ESG) factors impact a company's financial performance and corporate value.

The study is part of GPIF’s efforts to measure the impact of its ESG investments and stewardship activities. It says that the sustainable growth of the businesses it invests in, along with the overall health of the market, plays a bigger role in achieving stable, long-term returns.

For its research, GPIF employed quantitative analysis to understand the relationship between certain Key Performance Indicators (KPIs) from ESG indices and financial performance, and used multiple regression analysis (a statistical method) to determine whether these ESG factors actually influence corporate value indicators such as Tobin’s Q, Price-to-Book Ratio (PBR), and Return on Equity (ROE).

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Different control factors were also used in the study to get accurate results.

The results show that diversity-related KPIs, by and large, had a positive impact on corporate value indicators like PBR and Tobin’s Q. At the same time, corporate governance KPIs, for example, performance-linked pay systems, were reported to have an effect on ROE.

In the meantime, not all diversity-related KPIs have resulted in positive outcomes; some have shown inconsistency, indicating a lack of alignment with ESG goals in the context of PBR and ROE.

The study also dwelt at length on how ESG factors changed over time. For instance, establishing nomination committees had a strong positive impact on ROE between 2019 and 2022 compared to 2014 and 2017. On the other hand, factors such as anti-takeover measures showed a negative trend, signifying that they may not add to corporate value as expected.

While some ESG factors contribute to corporate value, others need to be reviewed further, the research concludes. GPIF will change its investment strategies if certain ESG factors fail to fulfil the desired outcomes, and will continue to monitor its sustainability investments.

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For more information about the study, click here to access the full report.

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Source: GPIF