Yahoo Finance Not a luxury: The investment strategy that’s outperformed during coronavirus
Investments with stronger environmental, social and governance (ESG) credentials weathered the first quarter sell-off better than their broader market equivalents, new research shows.
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While no asset was spared during the coronavirus-induced mass sell-off, companies’ ESG ratings were linked to outperformance, Fidelity International research this week revealed.
“The recent period of market volatility was shocking in its severity. A natural behavioural reaction to market crises is to lower investing horizons and focus on short-term questions of corporate survival, pushing longer term concerns about environmental sustainability, stakeholder welfare and corporate governance to the background,” said Jenn-Hui Tan, global head of stewardship and sustainable investing at Fidelity International.
“But this short-termism would indeed be short-sighted. Our research suggests that, what initially looked like an indiscriminate sell-off did in fact discriminate between companies based on their attention to ESG matters.”
Fidelity ranks companies between A and E on ESG considerations, with A having the strongest ESG ratings and E the weakest.
Its analysis of 2,600 companies found that for each additional level, companies added 2.8 percentage points of stock performance versus the index over the last few months.
The S&P500 fell 26.9 per cent between 19 February and 26 March, but companies within the A and B rankings fell less than average, while those in C to E fell more than the benchmark.
In fact, A-rated companies outperformed the benchmark by 3.8 per cent, while B-rated companies outperformed the S&P500 by 1.2 per cent.
At the other end of the spectrum, E-rated companies underperformed the S&P500 by negative 7.4 per cent.
“No asset was spared as the severity of the economic shutdown needed to contain the coronavirus outbreak became apparent to investors. The quickest US bear market in history, from February to March this year, was also the first broad-based market crash of the sustainable investing era,” Tan said.
“While some caveats remain, including adjustments for beta, credit quality and the sudden market recovery, we are encouraged by evidence of an overall relationship between strong sustainability factors and returns, lending further credence to the importance of analysing ESG factors as part of a fundamental research approach.”
Morningstar research delivered a similar finding.
Twenty of the 21 members of Morningstar’s Sustainability Index Family lost less than their broader market equivalents, index strategist Dan Lefkovitz noted in a recent blog.
The Morningstar US Sustainability Index lost 18.6 per cent - more than 2 percentage points better than the broad US equity market, Lefkovitz said.
And 51 of Morningstar’s 57 ESG-screened indexes, or 89 per cent, outperformed their broad market equivalents in the first three months of the year.
“The key to the story here is the relationship between strong ESG scores and attributes like quality and financial health,” Lefkovitz said.
“As investors of all kinds increasingly think about ESG factors as risk factors, the relative resilience of Morningstar’s ESG-screened indexes in first-quarter 2020 offers a proof point that ESG investing is not just about values.
“Far from a luxury best suited to bull markets, these factors materially impact companies’ financial results and investor portfolios.”
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