By Toby Belsom, Director, Investment Practices, PRI, and Bowie Ko, Research Analyst, PRI


Since our 2021 review of selected industry research on the connection between ESG factors and returns at a portfolio and equity level, a range of new papers has been published on the topic by leading asset managers and investment banks. This blog summarises our observations on how industry research has developed and some emerging themes. The end of the blog includes links to the research referenced.

Investors struggle to quantify climate risk

It is no surprise that climate as a risk factor or investment opportunity is gaining increased attention, given COP 27, a Democrat in the White House, the rising physical impact of climate change and more climate-focused financial products. However, the papers took different approaches to how climate metrics correlate with aspects of corporate performance or financial returns.[1] Climate risk may be increasingly recognised as central to investment risk but these papers reflect the lack of consensus on how to measure or utilise it for improved returns – especially as the data became less based on fact (Scope 1) and more on estimates (Scope 3) and opinions (on the effectiveness of transition plans, for example). Part of the challenge is the incremental nature of climate change. Rather than a specific event that highlights risk, such as discovery of fraud or a tax change, many drivers of climate risk erode or strengthen a business model over time. These drivers include changes in technology, regulation and consumer demand.[2] How to measure and utilise that understanding and information is clearly proving difficult.

Governance still rules and geography still matters

Regardless of the increased interest in analysing the correlation between climate and returns, industry research remains broadly in support of the premise that, among the range of ESG factors, governance-related factors have the strongest correlation with risk-adjusted returns.[3] The strength of the correlation also seems to vary depending on which geographic regional dataset is being used – US, Europe or Asia.[4]

Expanding beyond equities

Like much of the regulation of ESG disclosure, most of the industry papers we reviewed were focused on listed equity portfolios and assets. However, this is changing. Just as regulation is adapting to different asset classes, industry research has broadened its focus to include corporate credit, sovereign debt and alternative markets.[5] This development is clearly welcome and necessary as fund providers supply financial products across a wider range of asset classes.

Performance influenced by energy exposure

With high levels of volatility in 2021 and 2022, several papers focused on the impact that the macro environment had on the returns of ESG funds and the correlations between ESG rankings and returns.[6] In terms of performance measurement and analysis, using data from such a short period will always be problematic, however a repeated theme was that firms with higher ESG rankings provided more resilient relative returns during this period of high market volatility.[7]

Over the two years, sector weightings in ESG funds also had a strong bearing on returns in rules-based and active ESG equity portfolios. Underweight positions in the energy sector were a significant headwind over the period as the Ukraine war disrupted energy supply, demand and policy.

Looking ahead

We also reviewed a selection of 15 2023 investment outlooks from leading asset managers and investment banks. Half a dozen of these included dedicated sections on the importance of the energy transition and its implications for capital allocation.[8] The increasingly common reference to climate commitments and the energy transition would indicate that this is now an essential consideration for portfolio construction. It would seem that an increasing number of these authors – often in-house strategists and economists – now believe these were crucial contributors to returns and should influence or inform capital allocation decisions.

Some of the reports also outlined the investment implications of issues such as land resources, the blue economy, financing biodiversity action and the SDGs.[9] Coverage of these issues may not be new, but explicit inclusion in these general investment outlooks shows how these issues are now being incorporated into mainstream investment decision making.


Our review of these industry papers only touches the surface of much of the research and analysis being undertaken across the investment industry. The academic world has also proved to be a rich source of analysis. Recent market volatility has meant that some of the correlations referred to in earlier research have been stress tested in a new economic environment. One thing that does feel different is the more systematic inclusion of these factors into forward-looking investment outlooks. We would welcome comments and any research we have missed.

Selected industry papers

These papers are intended to provide a breadth of views and analysis from the investment industry.

Title Date

Explaining ESG Equity Index Fund Performance



How Do ESG Scores Relate to Financial Performance



Putting sustainability to the test: ESG outperformance amid volatility



How ESG Affected Corporate Credit Risk and Performance



Decarbonizing Everything: Climate Data, Industry Returns and Portfolio Construction



Morningstar Indexes’ ESG Risk/Return Analysis Reveals Mixed Results for 2021, Good Five-Year Numbers, and Stellar Downside Protection



The Recent Performance of ESG Investing, the Covid-19 Catalyst and the Biden Effect



Why might ESG factors increase returns?



CIO Insights

Deutsche Bank


2023 Global Outlook



Roadmap to recovery: Portfolios to anticipate opportunities

Citi Group


Investment Outlook 2023 A fundamental reset

Credit Suisse


Investment Outlook Q1 2023 - Looking for a silver lining




The PRI blog aims to contribute to the debate around topical responsible investment issues. It is written by PRI staff members and occasionally guest contributors. Blog authors write in their individual capacity – posts do not necessarily represent a PRI view.