Company performance and ESG ratings have been positively correlated during the market volatility caused by the Covid-19 pandemic – which has led to governments worldwide to roll out unprecedented measures.
A study carried out by Fidelity International found that equity and fixed income securities issued at the top end of the fund manager’s sustainability rating scale have, on average, outperformed those with weaker ESG credentials – “with a remarkably strong linear relationship”.
The research, which compared the performance of over 2,600 companies based on Fidelity’s own ESG ratings (from A to E), analysed performance between February 19 and March 26 – as the economic and social impact of the pandemic became ever more apparent.
Over that period, the S&P 500 index fell by 26.9%, but companies with a high ESG rating (A or B on the scale) dropped less than the overall average, whilst those with a poorer rating (C to E) fell more than the benchmark, according to the research.
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 at Fidelity International, 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.”
The research also found the fixed income securities of higher-rated ESG companies performed better than on average than their lower rated peers from the start of the year up to March 23, on an unadjusted basis.
Tan added: “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.
“But this short-termism would indeed be short-sighted. Our research suggests that, what initially looked like an indiscriminate selloff did in fact discriminate between companies based on their attention to ESG matters.”
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