Financial markets were extremely volatile as coronavirus spread globally, but in the early months of the pandemic, climate-related stocks and shares in companies with high ratings for environmental, social and governance have outperformed other equity investments.

Long-termism is at the core of responsible investment, but this year’s volatility has forced investors in all strategies to consider short-term market dynamics. In these circumstances, thematic investors are compelled to incorporate event-driven decision-making.

We’ve looked at the performance of shares in companies worldwide earning at least 10 per cent of their turnover from climate themes and with a stockmarket value exceeding USD500 million. Some 613 stocks in developed and emerging markets meet these criteria and globally – as the first chart shows – they outperformed the FTSE All World index by 5.1 per cent between 10 December 2019, when the first COVID-19 cases became evident, and 24 April.

All four underlying climate sectors beat the index too: the Low Carbon Energy Production sector outperformed by 9.6 per cent, Energy Efficiency & Energy Management by 2.1 per cent, and Capital Development & Financial Products by 2.5 per cent.

Regionally, Asian climate stocks outperformed by 12.4 per cent and Latin America shares by15.1 per cent with Europe plus the Middle East and Africa also ahead, although North American climate stocks underperformed by 2.2 per cent.

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For the environmental, social and governance comparison we looked at the top third of larger companies with the highest ESG ratings and stockmarket values in the top 20 per cent of the FTSE All World index. The 210 companies outperformed that index by 3.7 per cent since 10 December. European ESG stocks beat the index by 8.6 per cent, Asian by 6.9 per cent and North America was just ahead too.

But because the long-term approach dominates in more normal markets we’ve also looked at returns since January 2007 – a period covering the global financial crisis, the subsequent sovereign credit crisis, stock market downturns in 2015 and 2018, plus this year’s pandemic.

Highly-rated ESG stocks outperformed the benchmark by 74.5 per cent and climate-related stocks by 66.1 per cent over the 13 years. In absolute terms, the ESG stocks grew by 248 per cent and climate stocks grew 232 per cent while the All World index rose only 99.6 per cent – as the second chart shows.

Asian Climate stocks beat the index by 64 per cent, North American by 96 per cent and European by 105 per cent.

The climate and ESG screens also outperform on a risk-adjusted basis, in our long term analysis using Sharpe and Sortino ratios, which consider returns relative to volatility.

This confirms our conviction that investments deliver shareholder returns when they create value for all stakeholders – employees, customers, suppliers, the environment and wider society.

Consequently, a key part of environmental, social and governance is looking at how companies serve society, and what this may mean for the future. When crises manifest – particularly with social and environmental causes and implications, including COVID-19 – we see ESG issues as a defensive characteristic. Investors should consider the materiality of these issues and assess how well businesses manage the associated risks and opportunities.

First published 29 April 2020.

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