Sustainable Companies Are Beating the Market During the Crisis. Will It Last?
Companies with higher environmental, social, and governance factors have outperformed the broad market since its February peak, contradicting views that the trend is just a bull-market phenomenon.
In a new report, companies with better ESG risk profiles beat those with lower ones since the S&P 500 peaked on Feb. 19, according to a report by Sara Mahaffy, U.S. equity strategist at RBC Capital Markets.
Meanwhile, two-thirds of actively managed sustainable equity funds were beating their benchmark in March, Mahaffy pointed out. They were helped by the fact that they were underweight in energy and financials; held higher-quality stocks as measured by higher returns on equity, invested capital, and assets; and they tend to own popular S&P 500 names that have held up better, such as Microsoft (ticker: MSFT), Alphabet (GOOGL), Visa (V), and Apple (AAPL).
“This is not a bubble or a trend,” says Erika Karp, CEO of Cornerstone Capital, an investment advisor with a sustainable focus. “ESG analysis is way more important than we could have imagined.”
RBC’s findings were echoed in a report by BofA Global Research strategists led by Savita Subramanian. The report showed that since the Feb. 19 peak, stocks with ESG scores in the top quintile outperformed those that ranked poorly by five to 10 percentage points in the U.S. and Europe. Meanwhile, stocks with lower ESG scores were seeing bigger cuts to earnings forecasts.
In Asia, BofA wrote, the phenomenon of ESG outperformance didn’t hold, partly because China and India outperformed Australia and Japan. That was partly because China, in particular, “has had better Covid-19 timing and containment,” the team pointed out.
“ESG is a bear market necessity, not a bull market luxury,” BofA wrote, disputing recent critiques suggesting that in times of stress, investors and companies would allocate all resources to staying afloat, and ...
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