Overview
The first nine months of 2020 were characterised by the Covid-19 crisis, which produced whipsawing markets, big changes in monetary and fiscal policy, and a uniquely austere economic outlook. This period contained the first broad-based market crash, and recovery, of the sustainable investing era, and so provided fertile ground for research into the relationship between sustainability and performance.
In a recent study, Fidelity International measured investment returns by proprietary ESG rating relative to the MSCI All Country World Index. The study found that the companies at the top of our ESG rating scale (those rated A and B) outperformed those with weaker ratings (D and E) in every month from January to September this year, apart from April. The cumulative difference in the two groups’ relative returns widened to 17 per cent during that time period.
Looking deeper into the results, we found the groups with higher ratings fell less as the markets collapsed but rose less when markets recovered sharply in April, versus those with lower ESG ratings. This outperformance in a severe drawdown and underperformance during a sharp market rebound 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.
We also saw a linear relationship across the ESG ratings groups, with each one beating its lower rated group from A down to E across the nine-month time frame. This supports our initial hypothesis that companies with good sustainability characteristics have more prudent management and will demonstrate greater resilience in a crisis.
The cross-asset study encompassed 2,659 companies covered by our equity analysts, and 1,450 in fixed income, using Fidelity International’s proprietary ESG rating system. The full white paper on the research can be accessed here.
