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.

Download the whitepaper