Examining the correlation between ESG performance and stock prices : a systematic literature review

Abstract

What does it set out to do and why? The purpose of this study is to investigate the relationship between Environmental, Social, and Governance (ESG) performance and stock prices. Furthermore, this study seeks to understand the impact of ESG components on financial stability, investor behaviour, and stock performance. Given the increasing relevance and awareness of sustainable investing, it is critical to understand whether and how ESG practices influence financial results. How does it seek to do it? This study uses a Systematic Literature Review (SLR) method on a dataset of 217 research articles once all inclusion and exclusion criteria are applied to analyse the impact of ESG factors in different countries, investment types, and markets. To examine differences in ESG's influence on financial results, the data is classified by the year of study, geographical emphasis, sector, and investment strategy. What are the general findings? The findings suggest an overall positive relationship between ESG performance and stock prices, with many studies indicating that good ESG practices are associated with increased financial stability, particularly during crises, as well as improved investor sentiment. Significant regional differences exist, with Asia, particularly China, leading the way in ESG-focused research, suggesting that investors are becoming more conscious of and incorporating ESG considerations into their decision-making. What are the specific findings? Research specifically shows that utilising ESG as a risk management strategy is advantageous, especially in challenging economic times, and that investing in individual stocks and indices with high ESG ratings generally yields positive results. Additionally, it was demonstrated that behavioural finance and ESG improved stock performance, pointing to a shift towards more sustainable and deliberate investment decisions. What do these suggest? These findings suggest that integrating ESG factors increases both business resilience and long-term investment value. This might inspire more firms and lenders to prioritise ESG considerations. What conclusions are reached? The study suggests that ESG practices are increasingly important for financial success, suggesting that organisations with strong ESG strategy have superior stock performance and stability, especially during challenging economic periods.