A study by NN Investment Partners (NN IP) has suggested excluding companies that behave “controversially” does not come at the expense of returns but rather can actually improve investment results.

The study – on the correlation between ESG factors and returns – also found that companies improving their ESG scores tended to deliver better returns than those that already enjoy the highest scores.

Jeroen Bos, head of the Equity Specialties boutique at NN IP, said: “Pension funds could factor this in to their investment policies.”

He added that encouraging companies to improve their ESG scores through engagement also lead to better results after adjusting for risk.

The study was conducted in co-operation with the European Centre for Corporate Engagement at Maastricht University.

Researchers at Groningen University recently reached a similar conclusion about excluding investments in fossil fuels.

The economists Auke Plantinga and Bert Scholtens found that excluding energy companies such as Shell did not come to the detriment of returns.

Bos said that no more than 5% of the 3,000 surveyed companies in developed countries were in the most controversial category.

According to the study, companies behave “controversially” if they, for example, are involved in conflicts, trigger court cases and demonstrations, commit offences or cause environmental problems.

“An increasing frequency of offences usually signals there is something wrong,” Bos said.

“At Volkswagen, for example, the number and seriousness of the controversies had already risen before the problems with the cheating software came to light.”

Bos added that companies with a positive ESG momentum, such as Visa or clothing company VF Corporation, tended to deliver better returns than already high-scoring firms.

“This phenomenon shows investors should not only look at the absolute score but also at the momentum,” he said.

“If companies combine this with engagement, they could also affect the direction of change.”

NN IP’s study was limited to developed countries, but the head of Equity Specialties said it would be extended to emerging markets.

“My intuition tells me many companies have even more potential to raise their ESG scores over there,” Bos said.

“We will look into whether this will also lead to better returns.”