The global investment manager’s research into the global equity market shows ESG leaders outperformed ESG laggards by 16.8% in the first quarter of 2020.

AXA IM also conducted the same analysis for the bond market and found ESG leaders outperformed ESG laggards by 5.2% over the same period of time while showing lower volatility.

According to Mr Yo Takatsuki, Head of ESG Research and Active Ownership, AXA IM, COVID-19 has presented the first major test for ESG investing, the rise of which over the last decade has largely coincided with the longest stock market bull-run in history.

“The COVID-19 pandemic is the first real ‘acid test’ of ESG investment theory,” said Mr Takatsuki. “There is no surprise that the pandemic is having a huge impact on the rapid stock market decline. Some of the world’s major equity indices, such as the S&P 500 and FTSE 100, have experienced their worst quarter since 1987. The MSCI All Country World Index (MSCI ACWI), an index of equities from developed and emerging markets, fell by a third from its peak in early February to its quarterly low in late March.

“While ESG scores cannot tell the whole story, our initial analysis from the first quarter of 2020 shows that valued ESG scores can be a positive sign for quality and resilience in tumultuous stock and bond markets. Similarly, in times of market stress, higher ESG ratings show a more defensive positioning.”

At the beginning of April 2020, AXA IM conducted an analysis of how companies with different ESG ratings performed in the bear market for stocks during the first quarter.   Both asset classes were observed by AXA IM’s in-house ESG quantitative scoring methodology that investments with higher ESG ratings performed notably better and were more resilient in the quarter compared to investments with lower ESG ratings.The two portfolios were categorised by ESG rating score – leaders being high on the scale and laggards on the lower end of the scale. While both the ESG Leaders and Laggards had similar volatility over Q1, the graph below clearly identifies the ESG Leaders portfolio as outperforming.

When delving into the equities performance at a sector-level, AXA IM observed that Healthcare, Financials and Utilities had the most marked differences in returns between ESG Leaders and Laggards in the first quarter of 2020.

In a separate analysis, AXA IM looked at the impact of its firm-wide ESG investment standards and found that when these were applied to a portfolio of stocks, the portfolio outperformed the parent benchmark index by 47 basis points.

“We intend to undertake further research to understand whether ESG scoring offers similar results as the hoped-for recovery emerges,” said Mr Takatsuki.

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