Whitepaper: Putting sustainability to the test

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Executive summary

The first nine months of 2020 were characterised by the Covid-19 crisis, which produced whipsawing markets, big changes in monetary and fiscal policy, and a uniquely austere economic outlook. This period contained the first broad-based market crash, and recovery, of the sustainable investing era, and so provided fertile ground for research into the relationship between sustainability and performance.

We previously focused our research on the crash itself in the first quarter of 2020, testing the effect of this volatility on companies with different environmental, social and governance (ESG) characteristics. Our conclusion then, over a relatively short time frame, was that companies with high sustainability ratings performed better than their peers as markets fell. This bore out our initial hypothesis that companies with good sustainability characteristics have more prudent management and will demonstrate greater resilience in a crisis.

For a fuller picture of the relationship between sustainability and market performance in times of stress, we re-tested our ratings and carried out a research update to include the first three quarters of 2020, taking in the market recovery from April onwards. 

Strong correlation between market performance and ESG rating

We carried out a performance comparison across 2,659 companies covered by our equity analysts, and 1,450 in fixed income, using Fidelity International’s proprietary ESG rating system. We found that the strong positive correlation between a company’s relative market performance and its ESG rating held firm across the longer nine-month time frame.

The companies at the top of our ESG rating scale (A and B) outperformed those with weaker ratings (D and E) in every month from January to September, apart from April. Over the nine months, the A-rated stocks outperformed the MSCI AC World, while the linear relationship across the ESG ratings groups in the earlier research, which saw each one beating its lower rated group from A down to E, also held firm across the longer nine-month time frame.

Overall, we’re pleased to observe the relationship between high ESG ratings and returns over the course of a market collapse and recovery, supporting the view that a company’s focus on sustainability is fundamentally indicative of its board and management quality.