Investing in companies with better records on social issues and good governance pays according to the worlds largest asset manager, with those investments having proved to be more financially resilient during the coronavirus market crash.
Investment funds tracking the performance of companies with better ratings on environmental, social and governance (ESG) issues lost less money than those including worse performers in 94% of cases during the crisis, according to analysis by BlackRock, the US investment manager which managed $6.5tn (£5.3tn) in assets at the end of March.
The coronavirus pandemic and the associated lockdowns of the worlds largest economies caused chaos on financial markets, costing investors trillions of pounds as stock markets tumbled. The S&P 500, the US benchmark stock index, fell by more than 30% from the start of 2020 to its lowest point in March.
BlackRocks analysis, co-authored by the companys vice-chairman Philipp Hildebrand, suggested that companies with stronger “social” scores on factors such as better customer relations and better workforce management did better in the turmoil, as did those whose boards were judged to be more effective and independent.
“Companies with strong profiles on material sustainability issues have potential to outperform those with poor profiles,” the report said. “In particular, we believe companies managed with a focus on sustainability should be better positioned versus their less sustainable peers to weather adverse conditions while still benefiting from positive market environments.”
However, environmental factors – the focus of much ESG investment – were not responsible for outperformance. Neither was the relative lack of oil companies in ESG funds behind the outperformance, the report said, despite the collapse in oil prices weighing heavily on fossil fuel producers shares.
BlackRock said sustainable indices outperformed standard indices in market downturns in 2015-16 and in 2018. The outperformance also lasted through the market recovery, with 88% of sustainable funds losing less than their non-sustainable counterparts in the year to 30 April.
The outperformance of higher-ESG-rated companies was evident across stocks and bonds.
The data suggests that sustainable investments can also be financially rewarding for investors – contrary to the common perception that investors in sustainable companies will pay a price for more “moral” investments.
Despite the crisis, investors have poured more money into sustainable investments during 2020. In the first quarter of 2020, global sustainable mutual funds and exchange-traded funds brought in $40.5bn in new assets, a 41% increase year-on-year, according to BlackRock calculations. Separate data from Morningstar showed that the fourth quarter of 2019 and the first quarter of 2020 set consecutive records for inflows into US sustainable funds.
BlackRock has itself been responsible for much of the recent growth in ESG investing. In January it launched a raft of ESG products as it battles persistent criticisms of its role as the worlds largest owner of oil companies amid a global climate crisis. It also pledged to exclude companies who make more than 25% of their revenues from thermal coal from its portfolios on climate grounds.
The investor has faced strident criticism from activists for being a relative laggard in relation to other investors when voting on environmental issues at companies, although it says it focuses on engagement with company bosses rather than using its votes to force changes.
Less than $500bn of BlackRocks assets have some element of screening out companies on various criteria, such as moral or religious reasons, but only about $100bn of that is managed according to full ESG criteria. BlackRock has an ambition to increase that to $1tn by 2030.
In a separate report, the asset manager Janus Henderson said global dividends paid out this year could fall by up to 35% to $933bn, as the coronavirus pandemic hits company profits. Europe and the UK are likely to see bigger falls than the US, the company said, with banks, discretionary consumer sectors and economically sensitive industrial companies most affected.