Social enterprise stocks weather market storm better: BofA report

Study shows companies with ESG stocks outperform, suffer lesser earnings cut

The unprecedented sell-off in the market due to the coronavirus pandemic has underscored the importance of environment, social and governance (ESG) investing.

According to an analysis done by Bank of America (BofA), stocks with high ESG scores have fallen less than the overall market. Also, the downward earnings revision in these stocks has been less compared to the rest of the market. Notably, the assets under management (AUM) of ESG-focused exchange traded funds (ETFs) have grown this year even as the assets of passive funds based on the S&P500 index have shrunk drastically.

ESG is a term used to determine a company’s performance on non-financial parameters such as corporate governance, contribution towards environment and social development and employee welfare.

“Our contention has been that ESG factors are more critical drivers of risks during a downturn than during rosier periods,” says BofA a note titled ESG- Bull market phenomenon? Quite the contrary.

The brokerage has provided supporting data to back this claim.

“From the S&P 500's peak to today, stocks in the top-quintile ESG ranks outperformed the market by over 5 percentage point (ppt). And this was not just due to less energy or small cap exposure; we saw nearly identical results on a sector- and size-adjusted basis. In Europe, ESG indices outperformed their benchmarks year-to-date (YTD), and the top 50 most overweighted stocks by ESG funds have outperformed the most underweighted by more than 10ppt YTD,” it said in a note.

Interestingly, investors have pulled out less money from ESG funds than they have otherwise.

“Recent flow trends indicate that ESG may be more of a bear market phenomenon. Our BofA Securities client flows data indicated record ETF selling over the last few weeks but ESG funds have seen inflows for ten straight weeks,” it says.

This explains that even after the market selloff, ESG ETF assets under management (AUM) are still up nearly 5 per cent YTD, while S&P 500 ETFs have seen AUM decline by over 30 per cent.

However, while this is true to the developed world, ESG performance has not correlated to better scores in Asia.

For instance, the China and India despite having lower ESG scores have outperformed high-scoring markets Japan and Australia.

BofA study has found that corporates who fare badly on ESG were at risk to deeper cuts in earnings.

“Lower-ranked ESG companies in the US, Europe and Asia have seen larger downward earnings revisions for 2020 / 2021,” it noted.

In the current environment, the ‘S’in the ESG has gained even more prominence, says the brokerage.

“Social factors appear to carry heightened importance today. A track record of good employer/employee relations; safe, reliable branded products, and good workforce policies (including aspects like leave and childcare) have driven stock dispersion, more than good governance, which was most critical in the 08/09 financial crisis,” it observers.