In a recent research note, Bank of America Merrill Lynch has published 10 reasons why investors should care about ESG. These are:
1. You can do good and do well
ESG could boost your returns by a significant amount: a strategy of buying stocks that rank well on ESG metrics would have outperformed the market by up to 3ppt per year over the last five years. Thomson Reuters, Sustainalytics and MSCI ESG ranked companies have all out-performed all equally-weighted S&P500 since 2015.
2. Substantial assets is poised to invest in “good” stocks
Three critical investor cohorts care deeply about ESG: women, millennials, and high net worth individuals. Based on demographics, we estimate over $20 trillion of asset growth in ESG funds over the next two decades-equivalent to the size of the S&P 500 today.
3. 70% of US assets can’t be analyzed without using ESG criteria
Intangible assets have reached record highs for the S&P 500 companies. Analyzing financial metrics alone simply won’t suffice anymore, in our view.
4. Happy employees leads to better returns
Companies with high employee satisfaction ratings on Glassdoor.com have outperformed those with low ratings by nearly 5ppt per year over the past six years.
5. The best signal of earnings risk we have found
Traditional financial metrics, such as earnings quality, leverage and profitability don’t come close to ESG as a signal of future earnings risk or EPS volatility.
6. ESG could have helped avoid 90% of bankruptcies
15 out of 17 (90%) bankruptcies in the S&P 500 between 2005 and 2015 were of companies with poor Environmental and Social scores five years prior to the bankruptcies.
7. “Good” companies enjoy a lower cost of capital
Just like consumers have credit scores, companies pay different rates depending on their risk profiles. The cost of debt for “good” versus “bad” companies based on ESG scores can be nearly 2 full percentage points lower.
8. ESG controversies are expensive
Major ESG-related controversies during the past six years were accompanied by peak-to-trough market capitalization losses of $534 billion for large US companies. Loss avoidance is key for portfolio returns over time.
9. Climate change is top for investors
Climate change is the #1 ESG issue for ESG asset managers, according to The Forum for Sustainable and Responsible Investment, with $3tn of ESG assets considering climate change as part of their investment decisions.
10. You already do care about ESG
ESG is not new. Is management compensation aligned with shareholders? Is key talent happy or at risk of moving to a competitor? Does lax environmental behavior mean elevated legal risk? Stocks have been bought and sold on ESG concerns for decades. Today’s ESG discussions are largely focused on standardizing or codifying these elements, like we have seen for accounting and financial standards.
Copyright: Bank of America Merrill Lynch
Contact Melissa Anchan at BAML for more information.