Stocks with higher ESG ratings have outperformed those with weaker ESG ratings in 2020 says Fidelity International.
Fidelity says the research timeframe covered both the market crash in March and the recovery April-onwards. It suggests a strong positive correlation between a company’s relative market performance and its ESG rating. Over the nine months, stocks with an ESG rating of ‘A’ outperformed the MSCI AC World Index, and there was a clear linear relationship demonstrated across the ESG ratings groups, with each one beating its lower rated group from A down to E.
Fidelity carried out the performance comparison across 2,659 companies covered by its equity analysts, and 1,450 companies in fixed income, using the company’s proprietary ESG rating system. The forward-looking ratings are derived from direct engagement with companies, aggregating approximately 15,000 individual company meetings per year.
The findings in fixed income are similar to those in equity. The bonds of the 154 A-rated companies returned around -0.5 per cent on average, compared with -1.5 per cent for the 557 B-rated companies and -4.6 per cent for the 225 D-rated companies.
In the study, one exception to the rule came in April. For the rest of the months, the better ESG-rated stocks (A and B), had higher returns than poorly rated stocks. But in April, the groups with higher ESG ratings fell less as the markets collapsed and rose less when they recovered sharply compared with those with lower ratings. This 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.