For investors trying to take into account environmental, social and governance (ESG) concerns, the best response seems to have been to adopt a version of St. Augustine’s prayer: “Oh Lord, make my strategy pure, but not too quickly." For whenever the issue of socially responsible stock-picking arises, so too does the suspicion that doing good comes at a price.
A study published recently by Amundi SA, Europe’s biggest money manager with €1.5 trillion ($1.7 trillion) of assets, suggests that ESG’s first movers have been subject to a disadvantage, but the tide is turning in favour of the virtuous.
The Paris-based fund manager’s analysts took the stocks in various MSCI equity indexes and applied proprietary ESG scores to divide the constituents into quintiles. The research found that being at the head of the ESG crowd in recent years has indeed come at a cost—though that is changing.
In the euro zone, Amundi calculates that investors buying shares of the companies that ranked in the top 20% for ESG and selling the bottom 20% would have suffered an annualised loss of 1.2% between 2010 and 2013. Following the same strategy from 2014 to 2017, though, generated a positive annualised return of 6.6%.
In North American equities, buying the best-in-class stocks and selling the worst from 2014 to 2017 would have produced an annualised return of 3.3%. From 2010 to 2013, the strategy would have cost investors 2.7% per year.
What explains both the discrepancy in ESG-inspired returns over the different time periods and the wider outperformance of the euro region in recent years? The best answer may be the bandwagon effect. As more money gets allocated to ESG strategies, companies with higher scores attract more investment, while those deemed to be less compliant are shunned, and the shifts become self-reinforcing. Europe has led the way in socially responsible investing, but other regions are fast catching up.
If the trend continues, momentum may well be on the side of the righteous—and investors will be able to talk about the positive effect that doing good has on returns.