ESG-Friendly Stocks Have Done Better in Virus Downturn, BofA Says

If you invest with environmental, social, and governance (ESG) goals in mind, you may do good, but you won’t do well. That’s the thesis behind the Department of Labor (DOL)’s proposed curb on corporate and other private defined benefit (DB) pension plans investing in stocks with high ESG scores.

But a Bank of America (BofA) research report begs to differ. ESG portfolios have logged superior performance over others, the banks’ analysts concluded, especially during the coronavirus economic slump.

“ESG is a bear market necessity, not a bull market luxury,” the report concluded. Lately, it said, exchanged-traded funds (ETFs) overall have been hit by outflows, but ESG-oriented funds have had inflows.

Credit those better returns. ESG has outperformed by 5 to 10 percentage points in in the US and Europe since the stock market peak in mid-February, versus stocks with lower ESG scores, BofA found. The “S” is the biggest reason for that here.

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“Social factors (employee satisfaction, product safety, good workforce policies) appear to be driving” investor preferences now, the bank reasoned.

The conventional view of ESG investing, the report explained, is that stocks that followed its principals were “nice to have” and not a “need to have feature of investors’ noblesse oblige.” But that belief crumbles under scrutiny and particularly during a downturn, the bank argued.

One explanation for ESG’s better returns could be that energy stocks have done poorly this year, thus dragging down non-ESG portfolios. While that may be an influence, the report conceded, other forces were at work.

Companies with lower-ranked ESG scores in the US, Europe, and Asia have been hit with larger downward earnings revisions for this year and next. Why? A “track record of good employer/employee relations; safe, reliable branded products; and good workforce policies (including aspects like leave and child care)” have eased investors’ concerns—“more than good governance, which was most critical in the ’08-’09 financial crisis,” the report read.

Amid furloughs and layoffs, employee satisfaction makes for smoother running operations, BofA contended. Stocks with high Glassdoor.com ratings outpaced others by five points in the recent selloff, it added.

On the debt side, green bonds during the March credit crunch fell less than euro-denominated A-rated corporates. The same held true with emerging market sovereign debt. What’s more, the banks’ analysts wrote, “improving ESG often means improving credit stories—a critical factor in bear markets.”

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Tags: Bank of America, environmental social and governance investing, ESG, Investment, Socially Responsible Investing, United States Department of Labor (DOL)

Australia’s second largest superannuation fund, First State Super, which manages over A$120 billion ($83.4 billion), said it will divest from companies that earn more than 10% of their revenue from thermal coal beginning in October.
The pledge comes as the fund released an updated roadmap for how it will transition to a low-carbon economy.

“It is essential that as a responsible owner, super funds set strong, ambitious, and transparent targets,” First State Super CEO Deanne Stewart said in a statement.

The goals for the company include achieving a minimum 30% reduction in emissions in its listed equities portfolio by 2023 and incorporating a new low-carbon index; setting emissions reduction targets; reviewing the fund’s energy portfolio mix to mitigate the potential for stranded assets; setting fund-wide targets for investments in renewable energy and new technologies; engaging with companies over their emission reduction targets and plans; encouraging the fund’s directly owned companies to reduce their emissions; and advocating for an economy-wide 45% reduction in greenhouse gas emissions by 2030.

“Some of these targets are ambitious, but we need ambition and aspiration across our fund, sector, and economy if we are to limit the increase in global average temperature to below 2 degrees, in line with the Paris Agreement,” Stewart said.

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Stewart said there has been significant volatility in the value of thermal coal companies over the past 10 years and insurance companies are increasingly indicating their intent to leave the sector in response to medium-term climate-related risks.

“Divestment from thermal coal mining is an important first step, but we recognize there is more to do,” said Stewart, “which is why we have committed to bold actions and real targets to shift the dial on climate change.”

In 2015, First State Super launched its “Climate Change Adaptation Plan,” which established how it would respond to climate change’s effects on the world and the economy. In addition to divesting from thermal coal, the fund also rules out investments in fossil fuels, tobacco, nuclear power, armaments, gambling, old growth forest logging, inhumane animal testing, alcohol, and pornography.

Last year, the fund acquired a one-third stake in a A$1.1 billion south Australian wind farm, and it has recently completed investments in a tire recycling organization as well as a bottle-to-bottle recycling business.

“These are just some examples of the innovation and new technology that is emerging every day to support our transition to a low-carbon economy,” said First State Super CIO Damian Graham. “We believe renewable energy and new technology investments will deliver for our members and community in the long-term, so we are developing annual targets to increase our commitment in these areas.”