Sustainable companies are beating the market during the crisis. Will it last?

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Companies with higher environmental, social and governance factors have outperformed the overall 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 the lowest since


S&P 500

peaked on February 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 beat their benchmark in March, Mahaffy said. They were helped by the fact that they were underweight energy and financials; held higher quality stocks as measured by higher returns on equity, invested capital and assets; and they tend to hold popular S&P 500 names that have held up better, such as



Microsoft

(ticker: MSFT),



Alphabet

(GOOGLE),



Visa

(V), and



Apple

(AAPL).

Flows to ESG exchange-traded funds remained positive in March, Mahaffy wrote.

“This is not a bubble or a trend,” says Erika Karp, CEO of Cornerstone Capital, an investment advisor focused on sustainability. “ESG analysis is much more important than we might have imagined. “

RBC’s findings were echoed in a report by strategists at BofA Global Research directed by Savita Subramanian. The report showed that since the peak on February 19, stocks with ESG scores in the top quintile have outperformed those that performed poorly by 5 to 10 percentage points in the US and Europe. Meanwhile, stocks with lower ESG scores were seeing larger cuts in their earnings forecasts.

In Asia, writes BofA, the phenomenon of ESG outperformance has not held up, in part because China and India outperformed Australia and Japan. This was in part because China, in particular, “had better timing and better containment of Covid-19,” the team stressed.

“ESG is a bear market necessity, not a bull market luxury,” BofA wrote, disputing recent reviews suggesting that in times of stress, investors and companies would allocate all resources to stay afloat, and that focusing on ESG was a luxury.

Eddie Perkin, director of equity investments at Eaton Vance, said there is a possibility that the push for companies to make ESG disclosures is slowing, particularly the disclosure of “finicky” ESG factors. “But big issues like climate change will continue to resonate with investors,” and corporate disclosures about environmental practices will continue to proliferate, he said.

Bud Sturmak, co-chief investment officer of Perigon Wealth Management, notes that sustainable investing is “built in”, with rating agencies, central banks, insurers and lenders integrating ESG risks into their assessments. “There is now a clear and direct line between a company’s ESG performance and the cost of capital, profitability and stock price volatility,” he says.

Regardless of the criticism, “the foundations of sustainable investing remain alive and well—despite the fall in oil prices and the fact that many governments’ green growth programs could be delayed, ”wrote Sustainable Market Strategies. “In fact, the current market prices of several investment themes relevant to ESG suggest that investors still believe the future will be more sustainable. ”

Write to Leslie P. Norton at [email protected]

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