As COVID-19 spread globally during the first quarter of 2020, financial markets turned extremely volatile in the U.S. and worldwide. The impact of COVID-19 has affected policymakers, investors, and firms on a global scale. Notably, during such volatile market conditions, Environmental, Social, and Governance (ESG) investment strategies have gained popularity worldwide.
According to Morningstar, ESG funds accounted for almost one third of all European fund sales from April to June 2020, with sustainable equity funds attracting 63% more than their traditional counterparts. Given the extensive reach of the pandemic and the disruption it caused worldwide, it is not surprising that investors and companies have recently increased their attention not only in accounting practices but also in other governance and social impact measures included in ESG ratings.
Dr. Díaz and colleagues collected Sustainalytics rankings from Bloomberg to identify ESG relative scores and sort companies based on their ESG characteristics. They gathered the overall ESG percentile rankings associated with the company relative to its industry peers and percentile ranks based on each of the ESG pillars, Environmental, Social, and Governance.
1.) Firms with high ESG scores outperformed the S&P 500 index.
2.) Firms with low ESG scores underperformed the S&P 500 during the COVID-19 window.
3.) The COVID-19 pandemic has moved ESG investing strategies into the spotlight.
4.) The Social and Environmental pillars may be the catalysts for the full recognition of ESG investing as a successful investment strategy as the global economy recovers from the pandemic.
— Environmental and the Social pillars of ESG are the key drivers of the observed patterns.
Implications for Practice
ESG is indispensable to understand factor investing in the new era of COVID-19. Moreover, the Social and Environmental pillars may be the catalysts for the full recognition of ESG investing as a successful investment strategy. It is recommended that investors pay attention to not only the general ESG rankings in their investment strategies, but also to the individual E, S, & G rankings.
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