ESG small caps outperform says RBC

Small and mid cap stocks with stronger ESG scores have outperformed this year says Sara Mahaffy, US Equity Strategist at RBC Capital Markets

Despite weaker inflows into ESG small and mid caps which saw flows reach new highs in January and then fall back, the stocks remain popular, especially for clean or renewable energy funds. The Industrials and Tech sectors experienced the largest increase in sustainable fund ownership during 4Q20 with clean energy outperforming strongly in 2020.

Data from Sustainalytics shows that within the Russell 2500, companies with stronger ESG assessments have slightly outperformed those with weaker scores on a sector-neutral basis since 2017. The highest scoring categories include Materials, Health Care, Financials, Staples, REITs, and Energy.

According to Mahaffy, the ESG momentum factor (yr/yr improvement in ESG risk scores) has been an in-line performer within the Russell 2500 since 2018, on a sector-neutral basis. Among categories, Healthcare, Communication Services, Materials, and Consumer Discretionary showed the greatest improvement in scores.