The global response to the coronavirus crisis has reinforced the importance of sustainable investing. With the private sector playing a key role in efforts to stop the virus and accommodate evolving consumer trends, investors should look for companies with strong environmental, social and governance (ESG) credentials for the dramatic changes unfolding around the world.
Sustainable stocks fell much less than the broader market during the historic market crash in the first quarter. But a sustainable investing agenda provides much more than downside protection. We believe that ESG-focused portfolios can deliver results in a wide range of market conditions and can provide several benefits to investors through the COVID-19 crisis and an eventual recovery.
ESG Focus Added Resilience in Sell-off
Companies with the strongest ESG practices relative to their peers are, by definition, higher quality companies. They are more profitable, have less volatile earnings and, according to research from MSCI, are better at mitigating serious business risk that can lead to large financial losses and bankruptcies. As a result, they tend to provide enhanced downside protection in times of market stress.
These attributes were in high demand during the recent sell-off. During the first quarter, companies with the highest ESG ratings (AAA and AA) in the MSCI ACWI Index fell by 15.6% on average, about 650 basis points less than those with the lowest ESG ratings (B and CCC) (Display). The spread was even wider for US equities, where ESG leaders declined by 10.8% in a market that tumbled by 19.6%. As a result, funds that focus on such ESG leaders fared well during the quarter. Morningstar reports that 70% of sustainable equity funds ranked in the top halves of their respective categories and 44% ranked in their category’s best quartile in the first quarter.