Companies that improve their environmental, social and governance reputations outperform the S&P 500 — major technology and financial services firms among them.
That’s according to researchers at FactSet, who broke out the S&P 500 into deciles based on ESG improvement scores using Sustainaylitcs ratings and then compared the top decile (e.g. the companies that improved ESG scores the most) to the S&P 500 SPX, -0.40% as a whole.
The chart below shows their findings.
While it is always difficult to say outperformance is due to any one factor, raising the question of whether causation or correlation is most at work, the figures do seem to indicate that companies are likely to see outperformance relative to their peers if they place an emphasis on improving ESG factors.
Primarily, if demand is boosted for these stocks because impact investors perceive the underlying companies as “doing good,” or at least doing better than rivals, there is an effect on share price, even with other factors also having an impact.
“The data indicates that companies that have increased their ESG scores — or exhibited ESG momentum — have seen outsized returns over the last five years as investor perception of and focus on ESG as an important factor has grown,” said Tyler Chaia of FactSet.
The performance gap is wide. The top decile of companies within the S&P 500 that improved their ESG scores over a five-year period, as ranked by Sustainalytics, put up over 4,500 basis points of outperformance relative to the index overall. A basis point is 1/100th of 1%.
The S&P 500 is up roughly 19% in the year to date, up 58% over the past five years.
Tech-sector companies drove much of this ESG-over-S&P 500 outperformance, but even within that group, companies that improved their ESG scores outperformed industry peers by 3,700 basis points.
Other data show the growing importance of ESG factors, even the perception of such factors, in investing decision-making, including in the fund industry. In 2018, US SIF, also known as the Forum for Sustainable and Responsible Investment, identified $12 trillion in U.S.-domiciled assets whose managers either review ESG issues as part of their investment analysis or portfolio selection or file shareholder resolutions on ESG issues at their portfolio companies’ annual meetings. This total is an increase of 38% since 2016.
Lisa Woll, CEO of US SIF, has been outspoken on what she says can be unfair analysis of ESG-linked stock returns. She wrote about it in a counter argument for MarketWatch this summer, saying that critics, including noted retirement expert Alicia Munnell, also writing for MarketWatch, too easily dismiss a “preponderance of substantive evidence that sustainable investing does not produce worse results for investors.”