Social premium on the rise
Social factors have, on average, been effective in each of the last six calendar years – and in 2020, when the coronavirus pandemic proved its virulence, these factors have proved especially important.
Revisiting the last bi-annual study in 2018 ‘A Social Uprising’ to examine how ESG factors have behaved during this period of market tumult, results this time showed the social premium has increased from an average of 15bps per month in 2018 to 17bps in 2020.
Companies with the lowest ranked social scores tend to underperform
The coronavirus and the imposition of lockdown restrictions across the globe have changed the way people live and work. Tales of shop shelves being emptied by panic buyers attracted criticism, but the pandemic has also brought out the best in people: many communities are working together to protect vulnerable members of society from the virus and the challenges of lockdown.
Companies, too, have been asked to consider the welfare of their employees and customers in ways unimaginable just a year ago. For example, banks are faced with widespread economic damage owing to the pandemic – and so, they are questioning how to balance the needs of shareholders with those of society. Against this backdrop, banks need to redefine their purpose from a social perspective.
These considerations, along with the climate crisis and the Black Lives Matter movement, have concentrated investors’ minds and, as they have integrated them into their investment decision-making, more companies have been challenged for their substandard behaviour.
The social factor is increasingly important among high-growth companies
What’s more, as the world continues its fight against Covid-19, many investors have sought high-growth, often speculative, companies. These high-growth names have historically often been run under dominant management with little regard to traditional standards of corporate governance – and this has not yet been to the company’s detriment, as measured by shareholder returns.
However, high-growth names in Europe and Asia have not been immune to the social awakening in recent years. Those companies with more social awareness than their peers have tended to outperform. Investors are willing to forgo traditional safeguards around company management to gain exposure to a hyper-growth company, but they appear less willing to sacrifice the treatment of employees and the broader society.
Commenting on the findings, Lewis Grant, Senior Global Equities Portfolio Manager, says “Our last study in 2018 proved social factors to be statistically meaningful for the first time. Today however, we have seen the social premium increase with the ESG spotlight turning to how companies treat their employees, customers and suppliers. We have long argued that ESG factors can generate alpha in both bull and bear markets, and those companies which play an active role in adapting to and mitigating some of the greatest challenges that we face today are likely to be rewarded.”