Ethical investments outperform rivals during coronavirus market slump

16 April 2020

The more ethical or environmentally-friendly the stock, the better it is weathering the economic storm

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Investors in ethical companies lost far less money than standard investments during the coronavirus market slump, experts claim.

The outbreak caused stock markets around the world to fall to their lowest levels since the 2008 global financial crisis. While there has been some recovery, these market indices are still far below their previous levels.

But experts say companies with the highest score for environmental, social and governance (ESG) issues performed more than 10 percentage points better than those rated least.

What is ESG?

Definitions vary, but broadly ESG is a set of positive attributes that a company can have. For example, a company or fund with a high ESG score might have initiatives to offset carbon emissions, be committed to equal opportunities in the workplace or avoid industries commonly regarded as unethical such as arms manufacture or the production or sale of addictive substances.

How much better have ESG investments performed?

Fidelity International says the S&P 500 fell 26.9% on average between 19 February and 26 March. Companies it rated A for ESG issues fell 23.1% during the same period, while those rated E fell 34.3%.

Other investment experts identified a similar pattern. Interactive Investor (ii), which owns Moneywise, says ethical funds outperformed non-ethical rivals this year, including  the start of the coronavirus crisis.

In America, ii says the ethical FTSE4Good US Index lost 11.7% from 1 January until 24 March, compared to losses of 14.5% for its comparable non-ethical rival, the FTSE USA.

In the UK, the ethical FTSE4Good UK Index lost 27.7% over the same period, while the FTSE All Share Index lost 28.5%.

Why are ethical investments doing better?

Some experts think ethical holdings are doing well because they tend not to invest in areas such as oil, which are performing badly.

Myron Jobson, personal finance campaigner at  ii, says: “It would be wonderful to think the increase in assets held in socially responsible funds and investment trusts on interactive investor reflects the growth of ethical investing more broadly.

"But in such a short space of time, it most likely reflects the fact that ethical propositions have held up a little better than the wider market. Nevertheless, this is further proof, were it needed, that investing for good doesn’t have to mean sacrificing performance.”

Others say it is due to good management. 

Jenn-Hui Tan, global head of stewardship and sustainable investing at Fidelity International, says: “Our thesis, when starting the research, was that the companies with good sustainability characteristics have better management teams and so should outperform the market, even in a crisis. The data that came back supported this view.”

 

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