Company stocks with higher environmental, social and governance scores have been outperforming the broader market this year.
According to Bank of America Corp., companies with high ESG scores have outperformed and traded at a higher valuation, Bloomberg reports. During the sell-off in the first quarter, S&P 500 members in the top quintile of ESG rankings outperformed the index by over five percentage points. Investors have also paid less for stocks with lower ESG scores, with relative valuation premia rising among those deemed more socially responsible.
“Good ESG companies typically have better return on equity, lower earnings volatility and lower share price volatility,” Sameer Chopra, head of Asia ESG research at Bank of America, told Bloomberg, adding that the ESG stocks have grabbed investor attention, notably those focused on employee health and safety.
Flows into ESG strategies also surged and were four times higher compared to the “historical run rate” of money going into such funds for year ended July, according to Bank of America reiterated.
Investors sought out the ESG theme in markets around the world. For example, the MSCI Asia Pacific Index’s members with the top 20% of ESG scores by the index compiler traded at forward price-to-earnings ratios that were five points higher than those at the bottom quintile at the end of 2019, compared to the two-point gap in 2017. Asian companies with below-median emissions also traded at multiples that were two points higher than their peers.
Chopra, though, warned that companies with high ESG scores could be negatively affected by carbon taxes. For instance, industrials and airlines stocks in Asia could see lower earnings due high carbon exposure and low margins.
The ESG investment theme has gained momentum this year after governments push forward virus-related recovery funds into health and environmental projects. Meanwhile, prominent names like BlackRock have lauded the performance of ESG investments as a defensive core investment to limit volatility and price declines.
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