Researchers at Imperial College claim to have identified the environmental and social initiatives that drive higher returns for portfolio companies, and those that contribute to underperformance.

Using artificial intelligence (AI), academics working for the college’s Leonardo Centre on Business for Society waded through 45,000 corporate sustainability reports, published by 10,000 listed and non-listed companies over the past two decades.

Within them, they identified more than 900,000 ESG initiatives, and pinpointed 14 different ways that they could potentially contribute to the UN Sustainable Development Goals, including more superficial actions like measurement and advocacy, and more profound ones like training, organisational change and innovation.

Using the S&P 500 as a parent index, the team then created two identical portfolios of companies.

In the first, it overweighted constituents that undertake more innovation-focused projects, such as sustainability-related R&D or launching new products, than their peers.

The second portfolio overweighted firms that prioritised advocacy-style initiatives – those centred on financial donations or communication campaigns, for example.

Professor Maurizio Zollo, scientific director of the Leonardo Centre, said back-testing the portfolios over 12 years generated “surprising” results: the innovation-focused version outperformed the S&P 500 by 92%, while the advocacy-focused version underperformed it by 70% over the same period.

“Clearly, there is a fundamental difference between advocacy and innovation in terms of the strategic value of these initiatives,” Zollo explained.

“The difference is a key indication of what Imperial researchers call ‘business impact maturity’, defined as the degree to which corporate sustainability strategy is part of, and eventually drives, business strategy.”

Zollo’s team are now using the research to inform a set of “behaviourally-grounded” corporate scores, which it will launch in coming months.

Read the digital edition of IPE’s latest magazine