The asset management industry is often hasty to boast about how superior environmental, social and governance (ESG) standards boost investment performance, and the crisis this year has been no exception. Data provider Morningstar went so far as to refer to ESG as an “equity vaccine” against the pandemic-induced market sell-off in February and March, reporting that 24 of 26 ESG-tilted index funds outperformed their closest conventional counterparts over the sell-off.
The theory makes sense. You might expect well-managed companies that treat their employees, suppliers and customers in a way that inspires goodwill to prove resilient in times of stress. ESG funds that exclude fossil fuels will also have benefited from less exposure to the oil price crash. And following hype over ESG as downside protection, it’s not surprising that ‘sustainable’ fund sales have been turbocharged this year.
But how can we know that it was the ‘ESG’ factors themselves helping to cushion falling prices? A study by Jurian Hendrikse and Philip Joos of Tilburg University in the Netherlands, Baruch Lev from the Stern School of Business in New York, and Elizabeth Demers from Canada’s University of Waterloo, suggests that we can’t.