A research paper from the trading efficiency research firm Inalytics has added some weight to the growing evidence quantifying the value of good governance at listed companies. At least the ‘G’ in ESG makes money.

The Inalytics research report published last week, ‘Does It Pay to Own Companies That do the Right Thing?’, finds that over the past two years, listed companies in the UK which had high governance risk ratings, according to ratings from PIRC (a voting advisory firm), performed poorly. Companies with low risk ratings and good governance performed well.

The report says: “The surprising thing is that there are very different results for large and small companies. We have found that the relationship between good governance and good share price performance is very strong for small companies, whereas for large companies it doesn’t hold at all. But in aggregate the relationship is strong.

“This is ironic as most of the focus is on large household names, whereas smaller companies tend to go unnoticed. Clearly a case of ‘no news is good news’.”

While various important research papers have shown a clear link between good governance and stronger share market performance, this is thought to be the first significant study to show a big difference between large-cap companies and smaller ones.

The research shows that companies with low-risk governance as defined by PIRC have, on average produced returns of 15.5 per cent above the high-risk companies. After doing a capitalization-adjusted weighting, their outperformance is 4.7 per cent.

PIRC’s ratings on four categories were used in the study: audit and reporting; board rating; compensation rating; and shareholders and capital rating.

Inalytics is based in London, run by founder and CEO Rick Di Mascio. The Australian rep, in Melbourne, is Amanda Field. Malcolm Smith, in London, is head of research.