Coronavirus has disordered lives and disrupted the world’s economies and financial markets. But within the stockmarket turmoil, shares of companies focused on climate change or ESG issues – environmental, social and governance – outperformed as the virus spread.

The environment is affected by COVID-19 through reduced air travel, home working, online deliveries, and temporary lower industrial emissions. There are consequences too for healthcare resilience, jobs and social inequality. And the effect on balance sheets raises questions around good financial governance.

ESG factors will be important in understanding how companies and sectors are exposed to this crisis.

But in the pandemic’s early weeks, shares in ESG-aware companies outperformed – though with some big regional differences.

We analysed 613 shares of global public companies valued at over USD500 million where climate solutions generate at least 10 per cent of revenues, plus the 140 stocks with highest ESG scores and values above the global average. And we looked at performance until 23 March from 10 December 2019, the crisis’s start, and from 24 February, when high volatility began.

The climate-focused stocks outperformed others by 7.6 per cent from December and by 3 per cent since February. The ESG shares beat others by about 7 per cent for both periods.

HSBC’s Climate Solutions Database has four divisions: Environment & Land Use Management, Low Carbon & Energy Production, Energy Efficiency & Energy Management, and Climate Finance. All beat the markets over both periods – Low Carbon by more than 11 per cent since 20 December.

Asia Pacific climate shares outpaced that region’s index by 13.6 per cent since 10 December and 5.6 per cent since 24 February. Latin America shares’ outperformance was 12.8 per cent and 5.7 per cent respectively. Europe outperformed since December but underperformed since February.

By contrast, climate stocks in the Middle East and Africa underperformed the region by 0.3 per cent since December and 0.9 per cent since February, and North America shares performed 1.9 per cent and 6 per cent worse than the regional index.

The ESG companies also outperformed in Europe and Asia but underperformed in the Americas.

European stocks with higher ESG scores beat the regional equity index by about 6 per cent since 10 December and by around 4 per cent since 24 February and the Asia-Pacific shares outperformed their region’s index by 8.9 per cent and 9.6 per cent respectively. However, the American shares underperformed their regional index by 0.5 per cent since December and by 4 per cent since February.

We think investors should consider how well companies manage these ESG risks. They should use ESG analysis to consider whether estimated earnings growth is still realistic, what increasing volatility means, whether to change risk premia – and what are the best-case, worst-case, and highest-likelihood scenarios.

Our core ESG conviction is that issuers succeed long-term, and hence deliver shareholder returns when they create value for all stakeholders – employees, customers, suppliers, the environment, and wider society. When crises like COVID-19 manifest, particularly with social and environmental causes and implications, investors can see ESG as a defensive characteristic.

First published 25 March 2020.

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Disclosure and disclaimer

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