Strong relationship between crisis performance and ESG

Companies focused on environmental, social and governance (ESG) factors have reported better stockmarket performance during the COVID-19 pandemic, according to Fidelity, indicating a positive correlation between ESG and market performance.

Using the firm’s proprietary A-E ratings of 2,600 companies, each ESG rating was worth 2.8 percentage points of stock outperformance versus the index.

Fidelity said there was a “strong linear relationship” between a company’s market performance and ESG rating with A and B-rated companies outperforming those with a C,D and E-ratings.

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 between 19 February and 26 March.

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Source: Fidelity International, April 2020

Jenn-Hui Tan, global head of stewardship and sustainable investing, said: “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. 

“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.

“A company’s focus on sustainability factors is fundamentally indicative of its board and management quality. This leads to more resilient businesses in downturns that will be better positioned to capture opportunities when economic activity resumes, more than earning its place at the heart of active portfolio management.”

The theory also applied to bonds with the bonds of 149 A-rated companies losing 9.2% on average, compared with losses of 13.2% for B-rated companies from the start of the year to 23 March, 2020.