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HSBC: Companies focused on climate change 'outperformed' as virus spread

Research note suggests businesses with strong ESG credentials are proving more resilient than peers to coronavirus turmoil. But there are regional differences.

A growing body of research has in recent years highlighted how listed companies with strong environmental credentials outperform the wider stock market, but now HSBC has released evidence that suggests greener stocks' relatively impressive performance is largely holding true throughout the coronavirus crisis presenting a good defensive opportunity for investors facing a worsening economic crunch.

The bank published a research note in late March from Ashim Paun, co-head of environmental, social and governance (ESG) research at HSBC, which details how "within the stock market turmoil, shares of companies focused on climate change or ESG issues ... outperformed as the virus spread."

The note argues that while the environment has been directly affected by the COVID-19 pandemic through reduced air travel, home working, online deliveries and temporarily lower industrial emissions, there are also signs that ESG factors provide useful guidance for investors looking to understand how companies and sectors are exposed to the crisis.

The hypothesis is that companies with good governance practices and high levels of exposure to long-term growth markets such as clean technologies should find themselves better positioned to manage short-term economic shocks and subsequent recovery.

Paun said HSBC analyzed 613 shares of global public companies valued at over $500 million, where climate solutions generate at least 10 percent of revenues, as well as the 140 stocks with highest ESG scores and values above the global average. It then analyzed the stocks' performance between the start of the crisis Dec. 10, 2019, and March 23, and from Feb. 24 until March 23, when the crisis escalated sparking high levels of market volatility.

It found that in the pandemic's early weeks, shares in ESG-aware companies outperformed the market, although with some big regional differences.

When crises like COVID-19 manifest, particularly with social and environmental causes and implications, investors can see ESG as a defensive characteristic.
The climate-focused stocks outperformed others by 7.6 percent from December and by 3 percent since February, while the ESG shares beat others by about 7 percent for both periods.

A more granular analysis assessing the performance of the four categories HSBC uses in its Climate Solutions Database — Environment and Land Use Management, Low Carbon and Energy Production, Energy Efficiency and Energy Management, and Climate Finance — found all segments beat the market over both periods, with low carbon companies outperforming by more than 11 percent since Dec. 20.

The regional picture was more mixed, with some regions seeing environmentally focused companies outperform their peers, with Asia Pacific to the fore, and others, such as North America, seeing modest underperformance from ESG stocks.

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

He added that ESG performance provided useful insights for investors as they seek to ride out the pandemic-sparked recession.

"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," he explained. "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."

The new analysis joins a raft of studies that consistently have shown how firms with strong ESG ratings tend to outperform their peers. Consequently, the past year has seen the launch of a wave of new ESG funds and market research services, designed to provide investors with more detailed information on how well positioned companies are to manage climate risks and the transition towards a net-zero emission economy.

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