A new report shows that funds tracking companies with better records on ESG issues outperformed 94% of their competitors in the market crash after COVID-19. Companies face growing ethical expectations from customers, investors, third parties and regulators. Adverse news mentions and broadcast content can help firms to assess whether a company is genuinely committed to ESG issues.
Why does ethical investment matter?
The US investment firm BlackRock has analysed the stock market performance of companies since COVID-19 began to spread across the world. In general, the markets have suffered from the effects of the coronavirus. In March, Standard & Poor’s fell by more than 30% since the start of 2020. But BlackRock uncovered a striking finding: Companies with good ratings on environmental, social and governance (ESG) issues were very resilient despite the market crash. They outperformed 94% of others in the crisis.
“Companies with strong profiles on material sustainability issues have potential to outperform those with poor profiles,” said the report. “In particular, we believe companies managed with a focus on sustainability should be better positioned versus their less sustainable peers to weather adverse conditions while still benefiting from positive market environments.”
This result is not a fluke. BlackRock found similar results when the firm studied market downturns in 2015-16 and 2018. On this blog, we have been following the performance of an index which tracks companies with a demonstrable commitment to the United Nations’ Sustainable Development Goals. In 2018-19, this index returned 13.7%, outperforming Standard & Poor’s by nearly 2%.
Why are companies that are committed to ESG issues so resilient? The reason seems to be that consumers, investors, employees, third parties, and regulators want to buy from, work for, and invest in firms with a social purpose that align to individuals’ values.
How due diligence helps determine ESG commitments
A focus on ESG is clearly the most sustainable way to do business and invest. But how can investors be sure they are investing in companies that genuinely support ESG issues? Since the 1980s, many companies have been accused of ‘greenwashing’ by creating a false impression of being environmentally committed.
The answer lies in finding the right data on companies:
- Adverse news mentions provide valuable insights into potential regulatory, reputational, financial, and strategic risks facing companies. If a firm has been criticised for its labour practices in a particular country, for example, this might call its ESG commitment into question.
- Critical mentions broadcast content provides the full context of a company’s position on ESG issues. While a newspaper headline might cherry-pick a single quote from a CEO, the transcript of their full interview might show the true extent of their ethical commitment.
- Legal cases, PEPs, sanctions, watchlists, and blacklists identify potential regulatory misconduct by firms. For example, a firm which claims to support ESG might use suppliers that been convicted of damaging environmental practices.
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