Study: Strong ESG practices could reduce the risk of corporate failure

A new study suggests that companies that invest in ESG (environmental, social, and governance) practices are less likely to face corporate failure. From an investment perspective, this could indicate that businesses with a strong ESG focus are more stable.

While the governance pillar of ESG investing is often overlooked compared to the others, it’s important.

Governance refers to how a company manages its operations. As a result, governance practices may also affect the environmental and social ESG scores of a company.

Good governance practices could improve accountability, ethical conduct, and transparency. Areas that investors might consider when determining whether a company is operating responsibly are board composition, executive compensation, shareholder rights, and risk management.

Strong governance factors could support investment goals

Research carried out by professor Omneya Abdelsalam from Durham University (25 March 2026), highlights why governance factors could be important to investors.

The research analysed tourism firms from across 26 countries between 2002 and 2018 to track each firm’s survival status. The researchers found that companies with higher ESG scores experienced a 1.22% lower risk in volatile earnings and a 12.4% probability of failure when compared with firms with weak ESG performance.

The study suggests that investors who consider ESG factors could benefit from greater stability.

However, there are some limitations within the research. Noting that the tourism sector is particularly exposed to global shocks, the researchers focused on this sector rather than analysing a broader range of businesses.

A long-term focus encourages stronger governance practices

Interestingly, the research also found that owners and investors had an impact on governance practices.

Tourism firms controlled by pension funds saw stronger risk-reducing benefits from ESG performance. Researchers linked this to the fact that pension funds are typically focused on long-term returns, which can reinforce sustainable practices.

In contrast, companies backed by hedge funds that may have a shorter-term focus than pension funds experienced weaker benefits. Indeed, in some cases, the benefits associated with ESG investment.

Firms with strong governance practices could reduce operational risks

For ESG investors, the research could strengthen the case that strong governance practices support long-term wealth creation by exposing businesses to less risk.

For example, a business that has established strong safety protocols for its employees is less likely to face reputational and financial damage from an accident and might be more likely to attract top talent.

Similarly, strong governance practices encourage transparency that could mean a firm is better able to mitigate conflicts of interest or fraud within the business.

As a result, businesses that embrace stronger governance could be attractive to investors.

As ESG reporting isn’t standardised, it can be difficult to compare the policies and ESG performance of different firms. ESG rating agencies may be useful, or you could invest through a fund with a governance focus.

An investment fund would pool your money together with that of other investors to invest in a range of companies that meet its criteria. This could help you diversify your investments and mean you don’t need to make day-to-day decisions about how to invest in line with your ESG goals, as the fund would handle this.

Remember, strong ESG criteria do not guarantee returns or lower volatility. All investments carry risk and it’s important to be aware of whether opportunities fit into your risk profile, as the value of investment values could fall as well as rise.

A clear investment strategy could help you assess investments to understand if they’re suitable for your circumstances while aligning with your ESG values.

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If you have any questions about ESG investing, please get in touch. We could help you assess how ESG factors could be incorporated into your portfolio in a way that aligns with your wider investment strategy.

Please note: This article is for general information only and does not constitute advice. The information is aimed at individuals only.

All information is correct at the time of writing and is subject to change in the future.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.