Outrunning a crisis: Sustainability and market outperformance

Outrunning a crisis: Sustainability and market outperformance

No asset was spared as investors realised the severity of the economic shutdown needed to contain the Covid-19 outbreak. The quickest US bear market in history, from February to March this year, was also the first broad-based market crash of the sustainable investing era and the one in which our research shows it came of age.

To test the effect of this volatility on companies with different environmental, social and governance (ESG) characteristics, we carried out a performance comparison across more than 2,600 companies, using Fidelity International’s proprietary ESG rating system.

The ratings, from A to E, are derived from our fundamental analysis and engagement with the companies themselves and, like our overall ratings, are intended to be a forward-looking assessment of a company’s sustainability profile. The rating system gave us a wealth of data to analyse the dispersion of returns between the five levels during the recent crash.

Our hypothesis, when starting the research, was that the companies with good sustainability characteristics have more prudent and conservative management teams and will therefore demonstrate greater resilience in a market crisis.

The data that came back supported this view. We found that a strong positive correlation existed between a company’s relative market performance and its ESG rating over this turbulent period. The equity and fixed income securities issued by companies at the top of our ESG rating scale (A and B) on average outperformed those with average (C) and weaker ratings (D and E) in this short period, with a remarkably strong linear relationship.

While some caveats remain, including adjustments for beta, credit quality and the sudden market recovery explored below, we are encouraged by evidence of an overall relationship between strong sustainability factors and returns, lending further credence to the importance of analysing ESG factors as part of a fundamental research approach.

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This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information.  You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. The Target Market Determination (TMD) for Fidelity Australian product(s) can be found at www.Fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.

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