Companies and investment funds that take environmental, social and governance (ESG) seriously have tended to outperform their peers during the Covid-19 linked market volatility this year, according to new research from US fund house Fidelity International and S&P Global Market Intelligence.

US fund house Fidelity said it carried out a comparison of the asset performance of 2,600 companies between February 19 and March 26, using its proprietary sustainability rating system that ranks companies from A down to E. According to the results of the research, companies enjoyed 2.8 percentage points of stock performance for every additional ESG ranking versus the S&P 500.

The benchmark index of the US’s largest companies fell 26.9% during the period of assessment.

“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,” said Jenn-Hui Tan, global head of stewardship and sustainable investing for Fidelity International, in the statement. 

Fidelity international's ESG ranked stocks vs. S&P 500 index

Fidelity ESG rating % of total rated Stock return (%) Stock return vs. S&P 500
A 12% -23.1 +3.8
B 39% -25.7 +1.2
C 33% -27.7 -0.8
D 14% -30.7 -3.8
E 2% -34.3 -7.4
Total companies 2,689    

Similarly, market research company S&P Global Market Intelligence did a dive into the performance of 17 exchange-traded and mutual funds with more than $250 million in assets under management that use ESG criteria to select stocks. It found that 12 have lost less value since the beginning of the year than the S&P 500 index.

The top performer in the analysis, the Brown Advisory Sustainable Growth Fund with an AUM of around $1.8 billion, registered a 5.4% drop in its price, compared to a 13.7% decline in the S&P 500 since the beginning of the year. Similarly, Calvert Research & Management's U.S. Large-Cap Core Responsible Index Fund, registered a drop of 12.1% in the year to April 9, according to S&P Global Market Intelligence.

ESG EXCELLING

Fidelity Investments noted that the performance of ranked companies was fairly linear. It said that ‘A’-ranked companies performed the best, outperforming the S&P 500 by an average of 3.8 percentage points during its period of coverage, while ‘E’-rated companies performed 7.4 points worse.

Similarly, the US fund manager said that bonds of companies with higher ESG ratings also generally performed better than their lower rated companies. The bonds of the 149 ‘A’-rated companies dropped by 9.23% on average while those of ‘C’-rated companies fell by 17.14%.  

“Our research suggests that [the market selloff] did in fact discriminate between companies based on their attention to ESG matters,” Tan said.

“It supports our view that a company’s focus on sustainability factors is fundamentally indicative of its board and management quality. This leads to more resilient businesses in downturns that will be better positioned to capture opportunities when economic activity resumes.”

While the performance of ESG funds and companies during the market downturn appear to support the benefits of sustainability metrics, investment experts cationed against reading too much into them over such a short space of time.

"While it's tempting to draw positive conclusions it is worth … recognising that sustainable investment is a long-term thesis and these are extraordinary times with various factors at play," Adam Gillett, head of sustainable investment at Willis Towers Watson, told S&P Market Intelligence in an email on April 7.

Article updated to clarify that Fidelity International is the author of its report.