COMPANIES WHICH do not adequately manage workplace health and safety (WHS) issues financially underperform those companies which do, a recent report has found.
Furthermore, investors could have increased returns over the past four years had they incorporated WHS measures into their investment strategy.
In particular, long-term investments in the top rated companies for WHS measures and selling short the low rated companies would have generated returns (above passive market returns) of 38 per cent for WHS management systems, 30 per cent for board/executive oversight and 25 per cent for WHS policies.
The results suggest WHS factors have potentially greater effectiveness at identifying underperforming stocks, according to Andrew Gray, head of Environmental, Social and Governance (ESG) research for Goldman Sachs JBWere.
“The data highlights the view of using ESG factors as ‘risk factors’. Under this approach, ESG factors –which tend to be longer-dated in nature – are primarily used to knock out stocks with more typical, shorter-term, investment signals then incorporated to form an investment portfolio,” he said.
“The rationale is that if a portfolio could avoid holding longer-term risk stocks, which is relatively easy to achieve given the ease of implementation of longer term ESG factors, then overall investment returns will be improved for marginal additional cost.”
This approach was also appealing because “blow-ups”, caused by something such as poor WHS or governance, may pose unacceptable risks due to the reputational risks being often disproportionately large for issues of this nature, Gray said.
“Overall, while the total history is too short to be definitive, the results indicate that WHS factors are showing significant promise with regards to correlating to share price returns, and therefore there is potential for investors to utilise these factors in seeking returns above passive market returns.”
The report was based on data supplied by Regnan Governance Research and Engagement. The data covered the period November 2004 to October 2007.