New research has shown that companies with good or improving social practices can potentially add up to 17 bps each month to investment returns.
An ESG study by the global equities team at Federated Hermes has found businesses working on their social practices had an average return of 17 bps (basis points) higher than their peers in 2020.
The social premium had increased from two years prior, when such companies outperformed by 15 bps.
Companies with governance rated as good or improving in 2020 added as much as 24 bps to monthly returns. In the APAC region, stronger governance led to a divergence as large as 29 bps, while European companies could outperform by 33 bps.
Social practices were especially important in Japan, where stronger companies outperformed by as much as 58 bps.
Meanwhile, companies with the lowest-ranked social scores report tended to underperform, lagging behind their peers by as much as 30 bps.
Lewis Grant, senior global equities portfolio manager commented the 2018 finding proved social factors to be statistically meaningful for the first time.
“Today however, we have seen the social premium increase with the ESG spotlight turning to how companies treat their employees, customers and suppliers,” Mr Grant said.
“We have long argued that ESG factors can generate alpha in both bull and bear markets, and those companies which play an active role in adapting to and mitigating some of the greatest challenges that we face today are likely to be rewarded.”
The past year has been key for ESG investing, amid a “global wake-up call” as the COVID crisis, climate change, the Black Lives Matter movement and political turmoil took hold, the Federated Hermes white paper said.
“These considerations – the climate crisis, the Black Lives Matter movement and the pandemic – have concentrated investors’ minds and as they have integrated them into their investment decision-making, more companies have been challenged for their substandard behaviour,” the report stated.
“Engagement and stewardship have become an integral part of the investor toolkit.”
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
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