Sustainable investing and environmental, social and governance (ESG) investment strategies are even with the COVID-19 around a topic for investors to take into consideration.
Globally, the percentage of both retail and institutional investors that apply environmental, social, and governance (ESG) principles to at least a quarter of their portfolios jumped from 48 percent in 2017 to 75 percent in 2019, according to Deloitte. They reported that 200 new funds in the United States with an ESG investment mandate are expected to launch over the next three years, more than doubling the activity from the previous three years.
Morningstar reported that the sustainable fund flows in the United States continued at a record pace in the second quarter of 2020, with estimated net flows of $10.4 billion.
There’s a growing pile of evidence indicating that stocks of companies that meet the standards for ESG-factors are likely to outperform the market.
Bank of America Merrill Lynch presented 10 reasons why one should care about ESG. Three interesting reasons are:
- ESG could boost your returns by a significant amount: a strategy of buying stocks that rank well on ESG metrics would have outperformed the market by up to 3 percentage points per year over the last 5 years.
- Traditional financial metrics, such as earnings quality, leverage, and profitability don’t come close to ESG as a signal of future earnings volatility or bottom-line risk.
- 15 out of 17 (90%) bankruptcies in the S&P 500 between 2005 and 2015 were of companies with poor Environmental and Social scores five years prior to the bankruptcies.
The table below lists the top ten Dividend Aristocrats and their Total ESG-core plus Controversy Level. The ESG Risk Rating is rendered on a 0-100 scale.
Lower is better, with 0 indicating that a company has no unmanaged ESG risk and 100 indicating the highest level of ESG risk. In practice, most scores range from 0 to 50, assigned to five risk categories:
- 0-9.99: Negligible ESG Risk
- 10-19.99: Low ESG Risk
- 20-29.99: Medium ESG Risk
- 30-39.99: High ESG Risk
- 40+: Severe ESG Risk
Here is a more visual representation of this ESG scale.
The Controversy Level is between zero (low) and five (high).
Figure 1: Dividend aristocrats by Total ESG Score
Members can use the dividend aristocrats ESG screener.
