ESG criteria crucial for outperformance

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© Coline Pavot, LFDE

By Coline Pavot, Head of SRI Research at LFDE

LFDE study: ESG criteria crucial for outperformance and resilience – especially in crisis year 2020

ESG criteria are an outperformance factor and an essential prerequisite for companies’ resistance to crises. This is confirmed by the latest “SRI & Performance Study by LFDE,” conducted by French asset manager La Financière de l’Echiquier (LFDE) for the third consecutive year. “The exceptional year of 2020 in particular, with its rapid market collapse and equally rapid recovery, has shown how resilient SRI investments are during crises,” says Coline Pavot, Head of SRI Research at LFDE.

Stable outperformance

During 2020, the portfolio with the best ESG scores (Top 40) posted a 15% return, outperforming the portfolio with the worst ESG scores (Flop 40) by a factor of 68. At the same time, the MSCI Europe SRI Index (+1.4%) outperformed the Flop 40 portfolio (0.2%) and the MSCI Europe Index (-3.32%).

Positive impact on crisis resilience

During the spectacular market crash in the first quarter of 2020, the top 40 portfolio performed the best with a performance of -19.1% and a maximum drawdown of -34.6%, while the flop 40 portfolio posted a performance of -30.5% and a maximum drawdown of -39.1%. ESG criteria are thus proving to be important factors in the resilience of companies during periods of extreme downturns in the financial markets.

Resilience does not rule out rapid recovery

While the stocks in the Flop 40 portfolio took a full 323 days to recover to their pre-crisis levels, the stocks in the Top 40 portfolio needed just 264 days – 59 days less. The best ESG profiles thus showed significantly better recovery momentum than the worst profiles.

Correlation of ESG and performance increases

For over 11 years, the portfolio with the best ESG ratings in our investment universe (Top 40) has outperformed the portfolio with the worst ESG ratings (Flop 40) by 3.2 times. Outperformance has thus increased by 2.3 times over 9 years (2019 study) and by 2.6 times over 10 years (2020 study) again in the past year. Previous studies have already presented evidence of the close correlation between the consideration of environmental, social and governance (ESG) criteria and long-term financial performance. Now, however, it also appears that the correlation between responsible investing and performance is becoming more intense. However, the higher outperformance was not associated with higher volatility.

Avoiding companies with poor governance (G) important

Individually, all environmental, social, and governance criteria are sources of performance. Over 11 years, the performance of the portfolio with the best ratings for the criterion ‘social’ (+362%), with the best ratings for corporate governance (+262%) and with the best ratings for the aspect ‘environment’ (+233%) is higher than the performance of the portfolios with the worst ratings for the respective aspects, of which the best one increased by 185%. However, of all the simulated portfolios, the top 40 portfolio (+399%) still recorded the highest value creation in an 11-year comparison. The portfolio with the worst governance ratings also posted the worst performance (+120%) over the same period. “Investments in the best-rated companies according to ESG criteria offer tremendous opportunities. However, avoiding companies with the worst governance ratings in a portfolio is also critical,” says Pavot.

Commitment further strengthened

Over the past year, LFDE, a pioneer in responsible investment in France for 30 years, has further strengthened its commitment. As of the end of 2020, ESG criteria were taken into account for 92% of assets under management. More than half of assets under management (51%) are SRI or impact investments. Three additional funds have received the French SRI label, bringing LFDE’s total to nine SRI-certified funds. In response to pressing climate issues, LFDE also launched an ambitious climate strategy at the start of 2021 and adapted its climate change policy.

“We believe that the financial sector, led by long-term investors, has an important role to play in financing the fight against climate change. For the first time in the post-industrial era in 2020, the world invested more in clean energy rather than fossil fuels – so there is reason for hope,” says Coline Pavot.

More about the „SRI- & Performancestudie by LFDE”
More information on LFDE’s climate strategy

About the methodology

The SRI & Performance Study by LFDE 2021 evaluated all internal ratings prepared by fund manager teams for 756 companies between January 1, 2010 and December 31, 2020. Only ratings dating back less than three years are considered. For periods longer than 3 years, the rating no longer reflects the profile of a company that has fundamentally transformed its ESG practices. Listed European companies of all market capitalizations are examined. The portfolios are equally weighted and are all based on an ESG filter (ratings). They are 100% invested, consist exclusively of equities and are regularly adjusted.

 

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