How does ESG impact corporate performance?
Our research highlights governance, including diversity of decision making, as a significant driver of operating profit margins for global listed real estate firms. Lower energy use and environmental partnerships also positively impact performance.
22 November 2021
By analysing the operating profit margins of over 600 global listed real estate firms, we have found that governance has the most significant contribution to firm performance out of multiple ESG benchmarks.
The number of non-executive directors; experience through board tenure; gender diversity at board level; moderated executive compensation relative to total firm assets; and high board meeting attendance all contributed to higher operating profit margins.
Lower energy use and environmental partnering also positively impact performance. Such environmental partnerships consider whether a firm partners with or is otherwise involved in initiatives with organisations focused on improving environmental issues.
The results suggest that by ensuring that the mechanism of decision making is optimised through a process of good governance, performance is enhanced for global listed real estate companies.
"The results suggest that by ensuring that the mechanism of decision making is optimised through a process of good governance, performance is enhanced for global listed real estate companies."
The results around gender diversity representation at board level also reinforce the idea of the importance of diversity in decision making. This may help minimise behavioural biases such as ‘groupthink’ and social proof (where an individual follows the same beliefs as the group) by providing different perspectives, potentially enhancing innovation and helping to mitigate risk.
With a plethora of information and ESG pathways available, these findings indicate that by drawing on environmental expertise through partnerships and optimising the internal decision making process, listed real estate firms are more likely to make the right sustainability decisions at the city, asset and financing level, contributing to performance.
What is governance and why does it matter?
Governance, or more fully, corporate governance, relates to the strength and effectiveness of the decision-making process. We first considered governance in Active Capital two years ago by analysing the impact of governance on the performance of global listed retailers.
We undertook this initial analysis on the basis that retailers were a particular tenant sector facing well-documented headwinds. The results suggested that governance may also inform on tenant covenant as global listed retailers with enhanced governance measures enjoyed higher average profitability and return on equity. This initial research echoes the findings of our latest analysis of the impact of ESG on global listed real estate companies.
The story behind the data
Using Global Industry Classification (GICS) real estate company data, covering over 600 firms between 2009 and 2020, we identified the statistically significant ESG drivers of operating performance by using a panel regression.
We included non-ESG related variables to control for the effects of firm size (total assets, market capitalisation and common shareholder equity) and risk (debt to total assets and the standard deviation of firm total returns), as well as firm age, location and time factors.
Both the ESG and non-ESG data was sourced from Refinitiv. We also replicated the analysis using purely cross-sectional analysis for the years 2019 and 2009 and across different performance metrics to check for the robustness of the results.
