New research finds that ESG screening boosts stock market performance

BlackRock financial services logo outside of office in San Francisco.
ShutterstockDavid Tran Photography
BlackRock financial services logo outside of office in San Francisco.

Screening companies and investments using environmental social governance (ESG) criteria can positively affect investment returns and stock market performance, an analysis released last week by one of Europe's largest asset managers has found.

Amundi, which manages more than $1.66 trillion worth of assets, looked at investment data from 2010 to 2017 to analyze the performance of 1,700 companies across five MSCI investment index groups using ESG criteria.

While ESG screening "had little impact" on volatility and "drawdown" — a decline in an investment or fund — over the period, the impact of ESG screening was "crucial" in terms of portfolio returns, the research found, particularly in the latter years of the study data.

Between 2010 and 2013, ESG investing tended to penalize both passive and active ESG investors, drawing average declines, but from 2014 to 2017 ESG investing outperformed other forms of investment in Europe and North America, according to the research.

During the later period, the data shows that buying the top 20 percent best-ranked ESG stocks and selling the 20 percent worst ranked ESG stocks would have generated annualized returns of 3.3 percent in North America and 6.6 percent in the Eurozone.

Overall, the study found ESG screening does not affect all stocks, but tends to affect the best-in-class and worst-in-class assets.

Thierry Roncalli, Amundi's head of quantitative research, said the new research "confirms the time-varying dynamics of ESG performance."

"Since stock prices reflect supply and demand balance, our research shows that ESG screening has influenced stock market performance," he said. "It is apparent that 'extra-financial' ESG risks have become financial risks and that asset pricing momentum is in favor of ESG investors."

Last year Amundi announced a three-year action plan to increase its commitment to responsible investment, so that by 2021 ESG analysis will be integrated across all its funds and initiatives in a bid to promote investment in projects with a positive environmental or social impact.

By improving ESG research, investors will be better equipped to understand the key issues in ESG investing, according to Vincent Mortier, Amundi's group deputy chief investment officer. "Our research confirms that ESG integration generates a tangible impact on equity performance in Europe and North America," he said. "By favoring a best-in-class ESG approach, investors are able to benefit from an investment strategy that improves long-term performance of the portfolios."

The news comes as the world's largest asset manager, BlackRock, has been urged to "vastly improve" its engagement with companies on climate issues by a group of major investors and campaign groups led by ShareAction.

Trillium Asset Management, Boston Common Asset Management and Ethos Fund have joined nine NGOs in writing to BlackRock CEO Larry Fink, criticizing the firm's contribution to meeting environmental goals and failure to take a harder line on greenhouse gas emissions with BlackRock assets.

Last year, Fink wrote an open letter to BlackRock companies setting out climate risk as one of its "engagement priorities," but the letter from campaigners published last week argues BlackRock "consistently votes against shareholder climate proposals and has a worse track record than other large global asset managers in this regard."

The letter therefore urges BlackRock, which boasts $6.4 trillion of AUM, to take a stronger approach to climate change issues with the companies in which it is a shareholder or investments it manages.

Jonas Kron, senior VP at Trillium Asset Management, commented: "As the Trump administration's agenda makes matters worse, BlackRock has the opportunity to push for climate solutions that will benefit its customers, portfolios and the economy upon which they depend. As many states, most major governments and a growing number of private sector leaders move to support the Paris Climate Agreement, BlackRock cannot afford to be a laggard."

BlackRock was considering a request for comment at the time of going to press.

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