00:01:10.780That rate companies' performance along those dimensions, environmental activity, social activity,
00:01:20.000which is related to who you're hiring, how much you're paying your employees, and governance, which
00:01:28.600is related to how the company is run. And the rating agencies use different specific measures along those
00:01:38.180three dimensions and then aggregate these measures to come up with an overall rating for a company. And
00:01:45.520companies pay for these rating services because in part they use it to promote their performance,
00:01:55.820their sustainability performance, just to use a broad term to cover those dimensions. Investment
00:02:04.760managers use those ratings to promote their ESG mutual funds and exchange traded funds to generate business
00:02:16.520from investors who are concerned about those issues when they place their money in different types of assets.
00:02:24.520And you've looked at 310 companies on the TSX. You've looked at their stock market returns and find
00:02:32.340no correlation whatsoever, positive or negative, between the two, correct?
00:02:36.520Well, let me just clarify one point, which is an important point. What we look at is the change in the ESG rating
00:02:46.180and then we relate that to stock market performance going forward. And the reason that's an important qualification is that a stock price will change
00:02:58.180because new information about the company's ongoing prospects have changed. So the change in the rating is important because that really can be considered new information about a company's
00:03:14.180ESG profile. And if investors are really concerned about ESG profile, then it's the new information that they're going to react to. And yes, what we did was we looked at the relationship between the change in the ESG rating of across our sample of companies and the performance, the stock performance, which includes, by the way, dividend payments and any stock splits over the next up
00:03:44.160to 12 months, up to 12 months beyond the rating change, which seems a reasonable amount of time to expect investors to react to that new information.
00:03:54.160And as you said, there's no statistically significant relationship, meaning any relationship we saw could be due to chance with relative confidence.
00:04:08.160As we know, stock market returns themselves can be very fickle. They're often influenced by a company's profitability, but not exclusively so. And you're not looking at, you know, a company's financial, you're not looking at a company's profitability, specifically, you're looking at the stock market return.
00:04:24.160So have you in other studies you've seen in the US because I know this hasn't really been done in Canada, seen a relationship between changes in ESG scores and how much a company is making one way or another?
00:04:36.160Well, you're quite right that the focus of most of the studies, including our study, our recent study, is on stock market returns.
00:04:46.160But the reason you want to look at stock market returns is because you can't observe future changes in profitability looking at accounting statements.
00:04:56.160The stock market returns, the stock market returns, and particularly the change in the price of a stock reflects what the broad, you know, millions of investors think is the future profitability outlook for the company.
00:05:12.160And so looking at the stock market change in the stock market price is really effectively looking at expectations about future profitability, which are not observable if you look at the accounting statements.
00:05:26.160Now, you might say, well, why not do a very long time series study and look at changes in future profitability?
00:05:33.160Well, that could be another piece of research, but it's not just the stock price change.
00:05:40.160Stock price changes also because many ESG proponents argue it reduces the risk of a company.
00:05:47.160And so it's the risk adjusted returns that you want to look at.
00:05:53.160And we have controls for that in our study, controls for the risk profile of the company.
00:06:01.160So what we're looking at is the stock market's expectation of future profitability adjusted for expected risk.
00:06:09.160One of the things that and I realize you're a scientist, you're following the numbers here.
00:06:14.160You're not trying to, you know, make the numbers fit a thesis, but there are going to be people that are very hostile to the ESG score and the whole regime there that say, OK, well, there's no point.
00:06:23.160And there are going to be people that are supportive of it that say, OK, well, it doesn't cost them anything, so it can't hurt.
00:06:33.160In fact, there was a piece yesterday in Globe and Mail where a CEO of a small Canadian company was referencing the significant cost to his company of complying with ESG reporting requirements.
00:06:52.160So, yes, the issue really does ultimately boil down to what are the costs and benefits of setting up a regulatory environment where all this reporting has to be done so ESG ratings can be created if there doesn't seem to be a relationship between ESG ratings and basically the efficiency performance of the company.
00:07:18.160Yeah, and I think that's a very significant point.
00:07:22.160And you have, I mean, I've seen this covering the World Economic Forum meetings in Davos.
00:07:26.160You have all of these companies that are bending over backwards to meet these targets and they're, you know, integrating with all of these different agencies.
00:07:33.160And you've created this entire industry on ESG consulting and ESG, like all of this, and people are making huge money on this.
00:08:08.160And really, all you can say, I think, with any kind of reasoned analysis is that there are non-financial benefits that are being realized by these investors, whether it's feel good that we're doing something good for the environment or we're addressing income inequality or racial discrimination.