Search this website. You can use fund codes to locate specific funds

Social factor outperformers prove resilient in equity markets

The scale of the pandemic and the response elicited has shone the light firmly on the ‘S’ of Environmental, Social & Governance (ESG) factors, but all three issues have come to the fore as the crisis has developed. Eoin Murray, Head of Investment, at the international business of Federated Hermes, takes a closer look at ESG performance and the importance of addressing these factors over the long-term.

Coronavirus has disrupted economies and financial markets in unprecedented ways, exposing the global economy’s lack of preparedness and resilience and radically reconfigured perceptions of sustainability.

Social factors once deemed to be non-financial or extra-financial concerns, have very clearly demonstrated that they are in fact financial matters indeed. We contend that their importance will only grow stronger through the global recovery and into the post-crisis world. The experience of what worked and what didn’t through the recent period must provide a framework for sustainable investment approaches going forwards.

Performance

Our proprietary research demonstrates that investment strategies which integrate ESG factors have historically outperformed those that do not. This observation, supported by academic evidence, holds across all asset classes. While we remain focused on sustainable value creation over long-term time horizons, YTD comparisons evidence the relative resilience of ‘social outperformers’ across equities, and of ESG factors more broadly in credit, through the recent market turmoil.

Equity

Research from our Global Equities team reveals that companies with poor or worsening social practices consistently underperformed their peers by 15bps each month since the beginning of 2009.

Credit

A study from Beyond Ratings and our Credit and Responsibily teams indicates that countries with the highest ESG scores (quintile five) have the lowest average CDS spreads, while those with the lowest ESG scores (quintile one) have the highest average CDS spreads. The difference in average spreads between these quintiles in terms of basis points is 140bps.

Resilience through a crisis: ESG outperformance

According to MSCI and Sustainalytics data, ESG factor performance has been positive relative to the broad market (here proxied by the S&P500 index) year-to-date. Constituents with the highest ESG scores (quintile 1) are consistently outperforming laggards (quintile 5) across all pillars on a market cap-weighted basis:

S&P 500 | Market Cap Weighted

 

S&P 500 | Market Cap Weighted

Q1 2020 Total Returns

Quintile 1

Quintile 5

Spread

 

Quintile 1

S&P 500 Index

Spread

MSCI Environmental Pillar

-19.1

-21.6

2.5

 

-19.1

-21.0

1.9

MSCI Social Pillar

-17.9

-21.3

3.4

 

-17.9

-21.0

3.1

MSCI Governance Pillar

-16.4

-23.1

6.7

 

-16.4

-21.0

4.6

MSCI Overall ESG Score

-14.8

-27.0

12.2

 

-14.8

-21.0

6.2

Source: S&P Global, MSCI, Federated Hermes

Importantly, this is not a sector specific phenomenon, with broad representation of ESG leaders outperforming in 8 out of 11 GICS sectors according to Sustainalytics:

Source: RBC, S&P Global, Sustainaytics, Trucost, Federated Hermes

The S factor?

The question remains as to why exactly these stocks have outperformed. Over the longer term, we can point to the creation of value for all stakeholders, including employees, customers, shareholders, bondholders, suppliers, the environment and wider society.  Through a pandemic crisis, set to catalyse or accelerate potentially long-lasting implications for social and environmental issues, perhaps investors ascribe even greater weighting to the importance of these factors?

On the social side, major societal challenges - of healthcare resilience, the welfare of service and gig-economy workers, and the misery caused by social inequality – have gained new prominence in the international consciousness.

From an investment perspective, people have postulated that ESG factors are merely proxies for elements of quality and momentum. While healthy cash flows, a robust balance sheet and strong earnings would all feature alongside sound corporate leadership and strategy, this crisis has demonstrated the importance of social responsibility in the context of companies’ ability to survive – and thrive over the long-term.

Latest Articles

Economic Outlook: Will the debt matter?
Neil Williams examines the impact that various pandemic-related stimulus packages have had on both global government debt and the efficacy of monetary and fiscal tools available to policy-makers.
Credit Investors not valuing their privacy
Evidence shows that bonds issued by private companies offer no premium versus those with public equity market capitalization. Historic data coupled with elevated risks highlight why Fraser Lundie, Head of Credit at the international business of Federated Hermes, views this as a mispricing.
Federated Hermes expands European footprint with local Spanish office
Federated Hermes has further expanded its footprint across Europe by establishing a local office in Madrid, Spain.
Federated Hermes, International maintains A+ rating in 2020 PRI Assessment
The international business of Federated Hermes has maintained the highest rating “A+” for Strategy and Governance from the UN PRI in its latest annual responsible investing assessment.
International business of Federated Hermes appoints Head of Corporate Communications
The International business of Federated Hermes has announced that Johnny Weir has been appointed as Head of Corporate Communications, with immediate effect.
Federated Hermes completes major expansion of its global stewardship business
Federated Hermes has completed a significant expansion of its stewardship team, EOS, with 13 new hires this year – 10 in the US and three in the UK.

Press Contacts

Johnny Weir,
Head of Corporate Communications
Rachael Dowers,
Manager - Corporate Communications
Hannah Bellfield,
Assistant Manager - Corporate Communications
Harriet Hall,
Associate - Corporate Communications