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I’ve never been the biggest fan of working from home – I enjoy the hubbub and camaraderie of the office too much. So, it’s been an unusual experience to manage a business and watch the recent market volatility via a laptop perched on top of a few stout books.  

Every crisis has its unique qualities and drivers, but a few behavioural truths tend to be common to all. For a start, investing timeframes tend to shrink when markets crash. This temporal tunnel vision is part of our natural “fight or flight” reaction and helps explain why the February to March selloff was so sharp. 

Investors were focused on questions of short-term survival, both human and corporate, as the severity of the Covid-19 outbreak and global lockdowns became apparent. And some chose to flee.

In such a fraught environment, it would be understandable - if disappointing - for markets to be indiscriminate in the sell off, to penalise all companies equally. But in fact, we’ve found that was not the case. 

Companies which had invested more into thinking about the sustainability of their business models in advance, those which had focused on improving environmental, stakeholder welfare and corporate governance (ESG) concerns prior to the current crisis, have generally outperformed their peers. And we can demonstrate this using data from our proprietary sustainability ratings.

According to our research, the price of a share in companies with a high (A or B) Fidelity sustainability rating on average dropped less than the S&P 500 from its February 19 peak to March 26, while those rated C to E fell more, on an unadjusted basis. On average among the 2,689 companies rated, each ESG rating level was worth an additional 2.8 percentage points of stock performance versus the index during that period of volatility. 

The findings in fixed income are similar to those in equity. The 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, even when adjusting for a potential bias towards high quality credit in the ratings.

Although based on a short timeframe, the research suggests that, what initially looked like an indiscriminate and panicked selloff, did in fact discriminate between companies based on their attention to sustainability matters.

It supports our view that a management team that focuses on sustainability factors is more likely to be a high-quality one and has a better chance of building a business that is resilient in a downturn. 

These are the factors we look at when assessing a company’s chance of surviving the next decade or two. But it appears as if the market rewards these same companies when that survival horizon shortens to years or even months. 

Looking ahead, the Covid-19 outbreak will lead to societal changes that will outlive the current market volatility, and the nature of sustainable investing will change with it. More focus, at Fidelity and among other asset managers, will be placed on the sustainability of business models and supply chains, the approach a company takes towards its staff, its suppliers, and customers, and how the ecosystem and expectations around individual companies have shifted during this lockdown period and beyond. 

The S – stakeholder welfare - in ESG is about to have its moment in the sun. 

This article first appeared in Financial News

Anne Richards

Anne Richards

Chief Executive Officer, Fidelity International