ESG investors beat the market

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April 23 2020
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Investors who are following strong environmental, social and governance principles are outperforming the market through the COVID-19 pandemic, a fund manager has announced.

AXA investment managers showed that ESG leaders outperformed ESG laggards by 16.8 per cent in the first quarter of 2020.

According to Yo Takatsuki, head of ESG research and active ownership, AXA IM, COVID-19 has presented the first major test for ESG investing, the rise of which over the last decade has largely coincided with the longest stock market bull run in history.

“The COVID-19 pandemic is the first real ‘acid test’ of ESG investment theory,” said Mr Takatsuki.

“There is no surprise that the pandemic is having a huge impact on the rapid stock market decline. Some of the world’s major equity indices, such as the S&P 500 and FTSE 100, have experienced their worst quarter since 1987. The MSCI All Country World Index, an index of equities from developed and emerging markets, fell by a third from its peak in early February to its quarterly low in late March.

Fidelity reaffirmed this through its own study, which compared across more than 2,600 companies, using its proprietary sustainability rating system. The forward-looking ratings are derived from direct engagement with companies, aggregating approximately 15,000 individual company meetings per year.

The data found that a company’s market performance and ESG rating are positively correlated, even in a crisis. The equity and fixed income securities issued by companies at the top of Fidelity’s sustainability rating scale (A and B) on average outperformed those with average (C) and weaker ratings (D and E) in this short period, with a remarkably strong linear relationship.

In the 36 days between 19 February and 26 March, the S&P 500 fell 26.9 per cent. Meanwhile, the price of a share in companies with a high (A or B) Fidelity ESG rating dropped less than that on average, while those rated C to E fell more than the benchmark. A-rated companies performed on average 3.8 percentage points better, while E-rated companies performed on average 7.4 percentage points worse than the S&P 500 during the period examined.

Jenn-Hui Tan, global head of stewardship and sustainable investing, Fidelity International, commented: “Our thesis, when starting the research, was that the companies with good sustainability characteristics have better management teams and so should outperform the market, even in a crisis. The data that came back supported this view.

“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.”

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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