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ESG passes ‘acid test’

Lachlan Maddock
— 1 minute read

Companies with higher ESG ratings performed better and were more resilient in the market massacre.

ESG leaders outperformed laggards in global equity markets by as much as 16.8 per cent in 2020’s first quarter, according to research from AXA IM. ESG leaders also outperformed by 5.8 per cent in the bond market and had lower volatility. 

“The COVID-19 pandemic is the first real ‘acid test’ of ESG investment theory,” said Yo Takatsuki, head of ESG research and active ownership at AXA IM. “While ESG scores cannot tell the whole story, our initial analysis from the first quarter of 2020 shows that valued ESG scores can be a positive sign for quality and resilience in tumultuous stock and bond markets.” 

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“Similarly, in times of market stress, higher ESG ratings show a more defensive positioning.”

Fidelity carried out similar research across 2,600 companies using a proprietary ratings system formulated on direct engagement with companies. And while no asset was fully spared in the sell-off, they found that a high ESG score was worth 2.8 percentage points of stock performance versus the index during the volatility. 

“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,” said Jenn-Hui Tan, global head of stewardship and sustainable investing at Fidelity International. “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.”

 

 

ESG passes ‘acid test’
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