Link grows between ESG focus and financial outperformance

Australian companies embracing sustainability are reaping more than just environmental benefits – they're outperforming their peers on the stock market

There is growing evidence of the business case for sustainability, and against claims that it inherently comes with financial trade-offs, with new research showing companies that prioritise sustainability significantly outperform their peers on the Australian Securities Exchange.

Comparing the financial performance of ASX-listed companies that participate in the United Nations Global Compact against non-participating industry peers, the study revealed that sustainable businesses on average enjoyed an annual 4.9 per cent enterprise value growth premium. According to the researchers, the results underscore that sustainability is good not just for the planet but also for shareholders.

Paul X. McCarthy, an Adjunct Professor in the School of Computer Science and Engineering at UNSW Sydney and co-author of Sustainability as Strategy: The Financial Performance of UN Global Compact Network Australia (UNGCNA) Member Firms on the Australian Securities Exchange (ASX), said the findings contribute to a body of research confirming the superior financial performance of sustainability-focused companies.

“Specifically, UNGCNA participants saw an 18 per cent growth in enterprise value over three years, compared with only 3 per cent for non-participants and 2.8 per cent for the broader market index,” said Prof. McCarthy, who co-wrote the paper with Michael Parker, Praxis Communication Australia Managing Director and AGSM @ UNSW Business School MBA alumnus, and Xian Gong, PhD Student at the University of Technology Sydney and Associate Researcher at Online Gravity. “This remarkable difference underscores the financial advantage of sustainable business practices, translating to an average annual shareholder return difference of 4.93 per cent in favour of UNGCNA participants,” said the paper (a peer-reviewed version is being published in a forthcoming book called Responsible Firms).

The results suggest that industry leadership which now includes sustainable business practices were likely key to these businesses’ superior results, with positive effects on reputation, innovation and risk management leading to better market performance, Prof. McCarthy explained.

As environmental, social and governance (ESG) goals assume increasing importance and focus for businesses and investors, a debate has lingered over arguments that companies may have to accept lower growth or returns in exchange for prioritising sustainability. However, this research, according to Prof. McCarthy, “underscores the strategic advantage of integrating ethical and environmental considerations into business models, proving that doing good can indeed lead to doing well financially”.

The sustainability advantage

The UNGCNA is the Australian branch of the UN Global Compact, the world’s largest sustainability initiative. It aims to align businesses, non-profits and universities with the compact’s Ten Principles of corporate responsibility in the areas of human rights, labour, environment and anti-corruption. About 330 companies in Australia participate in the UNGCNA, 68 (20.6 per cent) of which are listed on the ASX.

Learn more: A data-driven system that optimises sustainability initiatives and investments

“By encouraging greater transparency, accountability, and identifying opportunities that deliver positive outcomes, the UNCGNA enables participants to collectively contribute to the UN Sustainable Development Goals (SDGs),” according to the research paper.

Prof. McCarthy said he sought to study the financial impact of sustainability after learning last year about the ESG work the UN is doing with the Global Compact initiative. “I chatted with their impressive new CEO in Australia, Kate Dundas, and had the idea it would be good for our team to run an experiment to see if there is any material difference between the investor returns to member companies versus equivalent non-member companies,” he said.

The researchers decided to assess the impact of corporate engagement in sustainability and ethical practices (as defined by participation in the UNGCNA) on shareholder returns. To do so, they compared the financial performances over three years of 60 sustainable companies with 60 companies from the same industry without UNCGNA-aligned practices.

The results showed a “significant performance differential between the two portfolios”, the paper said, with aligned companies enjoying substantially higher enterprise value growth and superior returns.

UN Global Compact Network Australia members outperform peers by 14% in value growth

‘Dual moral and economic rationale’

The findings add to a “substantial and growing corpus of research” supporting the notion of sustainability strategies as a strategic business asset, according to the authors. “This study provides clear empirical evidence that aligning with the UN Global Compact Network Australia offers strategic and financial benefits for companies listed on the ASX,” the paper said.

“The positive financial outcomes for UNGCNA participants suggest that sustainable business practices may be a key contributor to their superior performance or at least aligned with their broader leadership,” Prof. McCarthy said. “This indicates that companies adopting sustainability not only meet ethical standards but also achieve better market performance due to enhanced reputation, innovation and effective risk management.”

The researchers also found the influence of public sentiment on how sustainability initiatives are valued financially “adds a layer of complexity to these benefits”, as such valuations can significantly vary. “Public sentiment plays a crucial role in the financial valuation of a company’s sustainability efforts,” study co-author Mr Parker explained. “Companies that effectively communicate their sustainability initiatives and align with global standards like the UNGCNA can enhance their financial performance by positively influencing public perception and investor confidence.”

The positive relationship between ESG engagement and financial performance “not only validates the ethical imperatives of sustainability but also highlights its role as a catalyst for financial success”, revealing UNGC participation as a “strategic asset that can propel companies towards both achieving global stability standards and enhancing shareholder returns”, the paper said.

“By aligning with UNGCNA principles, firms not only adhere to global sustainability standards but also strategically position themselves for financial outperformance, illustrating the dual moral and economic rationale for embracing sustainable practice,” it said. “This confluence of ethical commitment and financial strategy enriches the narrative for corporate participation in sustainability initiatives, offering compelling evidence for the business case of joining the UN Global Compact.”

Sustainability snapshot: Woolworths leads the way

UNGCNA participants include some of the largest ASX-listed companies in Australia, including all four major banks, both major supermarkets, BHP, Fortescue Metals Group and Wesfarmers. According to the research paper, while these 68 listed and aligned companies make up just 4 per cent of the 2000 total companies listed on the ASX, they represent 27 per cent of the top 200 and 39 per cent of the top 100 companies by market capitalisation.

Prof. McCarthy cited Woolworths Group as an investee company that “exemplifies” the sustainability leadership of UNCGNA-aligned companies, pointing to the retailer’s comprehensive sustainability plan. “Aiming to achieve 100 per cent renewable energy by 2025 – next year– Woolworths’ initiatives also include reducing food waste, minimising single-use plastics and supporting circular-economy principles,” he said.

When announcing the plan, former Woolworths Group CEO Brad Banducci expressed confidence that the move to renewables would be a positive business move as well as a contribution to a better and greener future. “Moving to 100 per cent renewable electricity is the right thing to do, and something a growing number of our customers, team members and shareholders expect us to lead on,” he said. “It represents a significant acceleration in our ambition to reduce carbon emissions from the health of our planet and the communities we serve across Australia and New Zealand. We use around 1 per cent of Australia’s national electricity, so we have a unique opportunity to use our scale for good and make a real impact.”

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According to Prof. McCarthy, the scale of such sustainability leaders means their outperformance can have a significant impact on the broader investment landscape in Australia. “Institutional investors, whose decisions influence share prices and shape future return expectations, as well as determine the cost of capital for companies, are increasingly prioritising long-term gains driven by ESG (environmental, social and governance) factors,” he said. “Companies that proactively adopt these principles are recognised as industry leaders.”