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Why ESG Matters—Now More Than Ever

A new BofA Global Research study finds companies that take environmental, social and governance (ESG) factors into account may enjoy advantages over companies that don't

 

AMID THE SURGING GLOBAL POPULARITY of sustainable investing, a central question has been whether investors who choose companies based on their environmental, social or governance records can still realize competitive returns. In other words, can profit and purpose go hand-in-hand?

A new study from BofA Global Research suggests a better question might be: Can investors afford not to take such issues into account? Based on a detailed analysis of thousands of publicly traded companies, ESG from A to Z: A Global Primer finds that companies with better ESG characteristics performed better financially within the time frames studied while those with poor records posed higher risks for themselves and for investors.

A global phenomenon 

The findings come at a time when sustainable investing is rapidly transforming from a niche of the investment world into what looks like an unstoppable force. Based on U.S. demographic trends, Savita Subramanian, Head of U.S. Equity & Quantitative Strategy for BofA Global Research, estimates that the amount invested in ESG funds could rise by $15-20 trillion over the next two decades. “That’s equivalent to the size of the S&P 500 today,” she notes. 

Past performance is no guarantee of future results.

Europe represents almost half of the current $30.7 trillion of investable assets in sustainability funds, according to the Global Sustainable Investment Alliance. “The rise of eco-political parties in power in Europe, a swell of millennials and ‘green’ investors have driven a groundswell of interest and awareness of the potential of ESG as both a financial investment and a way to help achieve broader goals,” says Subramanian.

Awareness also is on the rise among investors and companies in the United States. The Global Primer points to a “sea-change in U.S. corporate responsibility,” where companies are recognizing the importance of investing in employees, taking care of the environment and other issues. 

Avoiding corporate ‘blunders’

Among U.S. companies on the S&P 500 index, those that scored in the top fifth of ESG rankings outperformed their counterparts in the bottom fifth by at least three percentage points every year for the past five years, the report found.1

Past performance is no guarantee of future results.

The report also found that ESG metrics have shown to be better at signaling a company’s future earnings than traditional financial measures like its level of debt.2 They also helped investors avoid losses related to “ESG blunders”—when companies become embroiled in regulatory and/or public relations crises. Such missteps by U.S. companies eliminated more than $500 billion in market capitalization from 2014 to 2019.3

“Based on our findings, we believe that ESG considerations are no longer simply another option for investors,” Subramanian says. “They are an essential part of the investing process.”

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1 MSCI ESG Research LLC, FactSet, Refinitiv, Sustainalytics, BofA Global Research U.S. Equity & Quant Strategy

2 Based on median change in 3yr EPOS volatility of S&P 500 companies over subsequent three years, based on Refinitiv Overall ESG score from 12/2005-12/2015 (with volatility through 12/2018)

3 Includes 24 major S&P 500 corporate controversies related to data breaches, accounting scandals, sexual harassment and other ESG matters.

The information above is extracted from a previously published research report dated November 25, 2019, which contains additional information and important disclosures.  The report may be found at: https://www.bofaml.com/content/dam/boamlimages/documents/articles/ID19_12722/ESG_from_A_to_Z.pdf

Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. Further, ESG strategies may rely on certain values based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.

 

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