AXA IM analysts present ESG study: This is how sustainable stocks and bonds have performed over the past year

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ESG market is growing strongly
Sustainable stocks with strong performance
Signal for stable company?

ESG criteria are also becoming increasingly important on the stock market

The ESG trend has long since reached the stock markets. Investors are being offered more and more financial products that are intended to make sustainable investing possible. The abbreviation covers the factors environmental (environment), social (social) and governance (governance) and is intended to ensure that companies that follow these principles act in a sustainable manner. Recently, the US e-car manufacturer Tesla made a name for itself after the operator of the S&P 500 ESG sold the group of entrepreneurs Elon Musk summarily thrown out of the sustainability index. S&P Dow Jones explained in mid-May that Tesla could no longer be included in a reweighting of the compilation of ESG companies due to its CO2 emissions, reports of poor working conditions and the lack of processing of the “autopilot” accidents.

Interest in ESG investments is growing

And even if the Tesla sacking did not only lead to criticism from CEO Elon Musk, the topic is finding more and more supporters. According to financial services provider Refinitiv Lipper, ESG funds received inflows of over US$649 billion worldwide between January and November 2021. For the full years of 2019 and 2020, investments were $285 billion and $542 billion, respectively. The sustainable funds are said to have accounted for ten percent of global fund assets last year.

The asset manager AXA Investment Managers, a subsidiary of the French insurance group AXA, is also observing this trend towards sustainable investments. As part of a study, the strategists examined the performance of ESG investments over the past year.

Avoidance of ESG risks

“Responsible investing is very much about avoiding stocks with high ESG risks,” says analyst Hina Varsani from the study results. Therefore, companies should be examined in a pre-selection for their ecological footprint. The strategist points out that some sectors can be completely ruled out. “These include issuers with high climate risks, manufacturers and dealers of controversial weapons, and companies that contribute to deforestation and ecosystem destruction. But the soft commodity sector is also excluded because short-dated financial instruments can push up prices for wheat and soybeans, for example.” ” Companies that are active in tobacco production or whose businesses involve white phosphorus are also excluded.

Universal and specific ESG criteria

The institute calculated the performance of ESG stocks using the MSCI All Country World Index (ACWI), which includes companies of different sizes from developed and emerging countries, but removed stocks that do not meet the general and specific sustainability standards of the financial service provider. This cost the index 4.1 percent of market capitalization in the calculations.

Last year, the index’s total gross return was 18.54%, according to AXA analysts, but after eliminating ESG-critical stocks, the return jumped to 19.1%, up 57 basis points. According to the report, the ESG guidelines of AXA Investment Managers in particular led to an increase. “But the additional return from the exclusions confirms that an ESG pre-selection is not necessarily harmful and also protects against extreme ESG risks,” says Varsani.

ESG stocks outperforming

Again, the experts took a closer look at the MSCI All Country World Index, but not with regard to the market capitalization of the companies, but with the same weighting. A division into sectors was then made, within which the companies were then assigned according to their stock market value. However, possible secondary listings were not taken into account. “We then categorized the stocks into quartiles based on regionally adjusted ESG scores,” Varsani continues. “To rule out sector and style bias, this was done within the subgroups from the previous step.” The first quartile includes the companies with the best ESG score, and the fourth those with the lowest ESG rating. Compared to values ​​from weak quartiles, the top quartile performed significantly better. AXA analysts saw an excess return of over 540 basis points here, compared to the ACWI the ESG winners outperformed by 260 basis points. However, fourth quartile companies underperformed the index by 300 basis points.

Slight difference in ESG bonds

The situation is different with bonds, however. To do this, the experts used the ICE BofA Global Corporate Index (G0BC) and applied the same ESG guidelines that were used for the ACQI. This eliminated about 10 percent of the index, according to analyst William Mahoney. However, not much has changed in terms of performance. The index and the ESG model of the AXA strategists differed by less than one basis point on average for 2021. “This may indicate that the application of ESG and RI screening offers investors the opportunity to match or slightly outperform the broader market while providing some protection against ESG/RI-related tail risks.” “, the analysts say.

ESG filters can serve as a guide for investors

The AXA experts then filtered the calculations for positions that could have an ESG score of five or more points – which reduced the index by around 35 to 40 percent. “This should help mitigate the tail risks associated with ESG factors, but also has the effect of biasing our portfolio toward companies that typically outperform the index.” Here the strategists could see that the top ESG stocks beat the index by five basis points. “The application of such filters and ESG scores can help provide positive credit selection criteria that can potentially contribute to overall performance.” In addition, a high ESG score for companies can also be a signal for effective corporate management and long-term business strategies beyond the environmental aspect.

Regulation of ESG criteria required

Critics of the ESG sector, on the other hand, complain that the term is often misused for greenwashing. In this way, companies pretend to act more sustainably than is actually the case. For this reason, the US Securities and Exchange Commission wants to take action against the deception of investors through apparently sustainable investments – and regulate the criteria. The ESG service provider Novata recently called for an adjustment to the evaluation strategy that is used on companies to determine an ESG score.

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