Companies with better environmental, social and governance ratings had better returns in almost every month of 2020 so far.
Figures from Fidelity’s Putting Sustainability to the Test report showed stocks at the top of the fund house’s ESG rating scale outperformed those with weaker ratings in every month from January to September, apart from April.
The report, published yesterday (November 9), showed stocks with the lowest ratings lost 23 per cent in the nine months to September while those with the top ratings saw a positive return of 0.4 per cent.
Fidelity had analysed 2,660 firms.
It stated: “Overall, we’re pleased to observe the relationship between high ESG ratings and returns over the course of a market collapse and recovery, supporting the view that a company’s focus on sustainability is fundamentally indicative of its board and management quality.
“The groups with higher ratings fell less as the markets collapsed and rose less when they recovered sharply in April than those with lower ESG ratings.
“This suggests that those stocks with higher ESG ratings also have a low beta, high quality factor and are less prone to volatility in the broader market.”
ESG investing has boomed in popularity in recent years as fears over climate change have led investors to consider the impact of their money and as a growing number of millennials have begun investing.
Recent data from the Investment Association shows inflows into ESG funds have quadrupled in 2020 so far, with £7.1bn invested in such funds over the first three quarters of this year compared to £1.9bn.
Proponents of ESG investing often argue exactly what Fidelity’s report has found — that ESG risk is investment risk, as those firms that do not adhere to ESG standards are less likely to be sustainable businesses.
Fidelity found similar trends when analysing ESG in fixed income: the bonds of higher rated ESG companies performed better on average than their lower rated peers from January to September.
The bonds of companies with an ‘A’ rated ESG score lost around 0.5 per cent on average over the nine months, compared with a 4.6 per cent and 4.4 per cent loss for those at the bottom of the spectrum.
Fidelity said: “The market volatility of 2020 echoes that of 2008, despite the difference in circumstances.
“It would be natural to shorten investing horizons in a time of uncertainty and put longer-term concerns about environmental sustainability, stakeholder welfare and corporate governance on the back burner.
“But our research suggests that the market does, in fact, discriminate between companies based on their attention to sustainability matters, both in crashes and recoveries, demonstrating why sustainability is at the heart of active portfolio management.”
Just this morning Scottish Widows announced it was to divest nearly half a billion pounds from companies that failed to meet its new environmental, social and governance standards as it looked to protect investors from ESG investment risks.