Well-governed companies have outperformed poorly governed counterparts by an average of more than 30 basis points per month since the beginning of 2009, according to research from UK-based Hermes Fund Managers.

Its report entitled ‘ESG Investing – Does it make you feel good, or is it actually good for your portfolio?’, which examines the impact of environmental, social and governance (ESG) factors on equity returns, shows that, on average, companies rated in the top decile in terms of governance outperformed those rated in the bottom decile by more than 30bps per month.

The research also highlights that it is the companies with the lowest-ranked governance scores that have tended to underperform the average, rather than the higher-scoring companies outperforming the average.

Geir Lode, head of Hermes quantitative equities, said: “Our results suggest it is poor governance that leads to underperformance, rather than good governance leading to outperformance. Furthermore, our research shows that companies with a poor standard of corporate governance underperformed in 61% of the months during the time period.”

In terms of sectors and regions, using governance as an indicator of shareholder returns is more useful in Asia and Europe, he said.

North American markets are subject to more robust regulation, and companies are at higher risk of litigation, which has led to a generally better standard of governance across companies, making the measure less effective in the region.

Lode added: “This distortion in returns is also apparent by sector. If we turn to IT companies, there appears to be a negative relationship between governance scores and shareholder returns. The IT sector is dominated by a small number of companies whose performance over the past five years has been stellar despite a lower focus on their governance structure.”

However, despite the positive impact of companies with strong ESG characteristics, the impact of environmental and social factors was negligible.

Despite increasing suggestions that companies seeking to tackle environmental and social challenges are more likely to achieve a lower cost of capital and better risk-adjusted returns and are therefore more resistant to share-price volatility, there was no evidence to support this assertion over the same time period.

“Overall,” Lode said, ”we found a strong link between underperforming companies and poor corporate governance. Yet, we did not see either a statistically significant relationship between shareholder return and environmental or social metrics.

“As more data becomes available, and more asset owners focus on environmental or social considerations, this may change. For now, we conclude that favouring well-governed companies can enhance the return of equity strategies.”

Hermes analysed companies in the MSCI World index from the end of 2008 to end of November 2013.

In other news, research by CDP and Accenture found that average monetary savings from emissions-reduction efforts have fallen 44% in the past 12 months despite ever more companies reporting on their programmes and clear financial benefits from investment in sustainability measures.

According to the report ‘Collaborative action on climate risk’, this is due to an ever-widening gap between measures taken by large corporates and those by suppliers when the most important determinant of improved performance is collaboration across the supply chain.

There is enormous scope for more collaboration, with CDP supply chain programme participants identifying 2,186 collaborative opportunities.

Companies that engage with two or more suppliers, customers or other partners are more than twice as likely to see a financial return from their emissions-reduction investments and to reduce emissions, according to the report.

But companies often misdirect their emissions-reduction efforts with investment not closely correlated with proven emissions or monetary savings.

Suppliers and member companies are at odds – suppliers identified process emission reduction and product design as the most promising collaborative approaches, while member companies favour behavioural change initiatives and transportation and fleet investments.

The new CDP supply chain initiative ‘Action Exchange’ aims to drive targeted action on the most cost effective emissions reductions.

Gary Hanifan, global sustainability lead for supply chain at Accenture, said: “This report provides clear evidence that those who are most transparent about their climate change risks are more likely to achieve the greatest emissions reductions.

“And they are also more likely to enjoy monetary savings as a result of their responses to climate change risks. But the return on investment by the most proactive companies will not reach its full potential unless those companies can encourage their suppliers to follow their lead.”

The research also found a clear link between stalling progress on emissions reductions within supply chains and the uncertain regulatory framework, with 90% of companies that identify a current or future risk related to climate change citing regulatory risk as a barrier to investment.

The report also shows that investment in emissions-reduction programmes has declined in the past year and is shorter term in focus.

Seven out of 10 sectors report investment falling from earlier years. Shorter payback initiatives of less than three years are on the rise and almost doubled between 2011 and 2013.

The average sum invested per reporting company has dropped 22% since last year.

The research is based on information from 2,868 companies producing 14% of 2013’s global industrial emissions.

The report can be found at www.cdp.net.