24 Jan ESG Investing Returns – Do Sustainability Leaders’ Stocks Outperform?
Motivated by our response to FT Alphaville’s recent “Lies, damned lies and ESG rating methodologies” article – wherein we advocate for the merits of both ESG ratings and socially responsible investing – we conducted a benchmarking study of our 2018 sustainability award winners financial performance and returns.
Could we provide another data-based anecdote that helps answer the “Do sustainability leaders and their stocks outperform?” question?
The existing literature on ESG outperformance is quite compelling:
- “Deutsche Bank performed an analysis of more than 2,000 empirical studies dating back to the 1970s and found that about 90% of the studies suggested that ESG investing provides superior returns to passive investing” (quote via Forbes)
- A recent study from Axioma showed that “majority of portfolios weighted in favour of companies with better ESG scores outperformed their benchmarks by between 81 and 243 basis points in the four years to March 2018.”
Despite positive data points like these, doubts like FT Alphaville’s about sustainable investing are persistent:
- Financial advisors don’t believe the performance numbers: “According to a survey of financial advisors conducted by Cerulli Associates, only 19% of the advisers who use ESG products cite the strategy’s returns as the major factor behind their adoption. Meanwhile, 35% of respondents said concerns over negative performance was a significant factor keeping them from such strategies.” (quote via Marketwatch)
- Individual investors are also skeptical: A recent Morgan Stanley study noted that “53% of people worry that investing in line with their beliefs means earning less.”
To briefly summarize our own methodology, we compared a range of financial operating performance, governance, and shareholder returns data of our 2018 SEAL Business Sustainability Award Winners – a proxy for the “most sustainable companies in the world” – against all non-financial S&P 500 constituents. Our data was sourced via Fidelity, S&P CapitalIQ, and MSCI.
Our ESG leaders consistently outperformed their peers – measured by total shareholder return (TSR) over a range of horizons (1, 3, 5, and 10 Year):
In our initial FT Alphaville response we argued that strong sustainability practices are a good indicator of superior business quality:
“Widening your circle of competence to include ESG should pay off:
Sustainability leaders will often have deep moats, with high ROICs, strong management & governance with a long-term vision, able to retain top talent – sounds like a good screen for compounders.
Sustainability laggards are often fighting fires, reactive and just trying to survive.
Sustainability leaders have their sh*t together.
Using S&P Capital IQ’s qualitative scores, this appears to be the case: Sustainability leaders are high-quality firms – stable, healthy, and well-governed.
Similarly, our ESG leaders operating metrics – as measured by operating margin, return on equity, return on assets – outpaced their S&P 500 peers:
Consider this another data-driven anecdote in favor of a shift to more socially responsible investing.
Other Analysis Methodology Notes:
The S&P500 Excluding Financial Sector consisted of 470 companies. The metrics presented for the 2018 SEAL Business Sustainability Award winners reflect all 27 winners that are S&P500 components. As a result of this study focusing on S&P500 components, a number of international 2018 SEAL Business Sustainability Award winners – like Adidas, BMW, Kering, LG, and Samsung – and leading private companies – like Patagonia – are not included in our “ESG Leaders” basket.
Data was collected as of December 12, 2018.