Survival and sustainability

Anne Richards, Chief Executive Officer, Fidelity International

While the recent market sell-off initially appeared to be indiscriminate, a closer look suggests that investors did in fact discriminate between companies based on their attention to sustainability matters. Fidelity International CEO Anne Richards discusses this dynamic and also looks ahead to how the Covid-19 outbreak could lead to longer-term societal changes which will in turn impact the nature of sustainable investing.

Key points

  • During the global market sell-off, companies with Fidelity’s higher proprietary ESG scores outperformed those with lower ones across equity and fixed income markets.
  • This supports our view that a management team that focuses on sustainability factors has a better chance of building a business that is resilient in a downturn. 
  • Societal changes due to the Covid-19 outbreak will bring increased focus on the S in ESG - stakeholder welfare - and the approach a company towards staff, suppliers and customers. sustainability factors, in particular stakeholder welfare. 

Every crisis has its unique qualities and drivers, but a few behavioural truths tend to be common to all. For a start, investing timeframes tend to shrink when markets crash. This temporal tunnel vision is part of our natural “fight or flight” reaction and helps explain why the market sell-off in the first quarter of 2020 was so sharp. 

Investors were focused on questions of short-term survival, both human and corporate, as the severity of the Covid-19 outbreak and global lockdowns became apparent. And some chose to flee.

In such a fraught environment, it would be understandable - if disappointing - for markets to be indiscriminate in the sell-off, to penalise all companies equally. But in fact, we’ve found that was not the case.

Fidelity analysis shows higher-rated ESG companies outperform during sell-off

Companies which had invested more into thinking about the sustainability of their business models in advance, those which had focused on improving environmental, stakeholder welfare and corporate governance (ESG) concerns prior to the current crisis, have generally outperformed their peers. And we can demonstrate this using data from our proprietary sustainability ratings.

According to our research, the price of a share in companies with a high (A or B) Fidelity sustainability rating on average dropped less than the S&P 500 from its February 19 peak to March 26, while those rated C to E fell more, on an unadjusted basis. On average among the 2,689 companies rated, each ESG rating level was worth an additional 2.8% of stock performance versus the index during that period of volatility. 

The findings in fixed income are similar to those in equity. The securities of higher rated ESG companies performed better than on average than their lower rated peers from the start of the year up to March 23, even when adjusting for a potential bias towards high quality credit in the ratings.

Although based on a short timeframe, the research suggests that, what initially looked like an indiscriminate and panicked sell-off, did in fact discriminate between companies based on their attention to sustainability matters.

It supports our view that a management team that focuses on sustainability factors is more likely to be a high-quality one and has a better chance of building a business that is resilient in a downturn. 

These are the factors we look at when assessing a company’s chance of surviving the next decade or two. But it appears as if the market rewards these same companies when that survival horizon shortens to years or even months. 

Looking ahead, the Covid-19 outbreak will lead to societal changes that will outlive the current market volatility, and the nature of sustainable investing will change with it. More focus, at Fidelity and among other asset managers, will be placed on the sustainability of business models and supply chains, the approach a company takes towards its staff, its suppliers, and customers, and how the ecosystem and expectations around individual companies have shifted during the lockdown period and beyond.

The S – stakeholder welfare - in ESG is about to have its moment in the sun.

Important information

This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. A portfolio that focuses on securities of companies which maintain strong environmental, social and governance ("ESG") credentials may result in a return that at times compares unfavourably to similar portfolios without such focus. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security's ESG credentials can change over time. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Issued by FIL Pensions Management, authorised and regulated by the Financial Conduct Authority and Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited.