Clean Break

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What's going on?

Investors who’ve kept their hands clean with companies that score well on environmental, social, and governance (ESG) measures have found their portfolios currently look healthier than most.

What does this mean?

Like plenty of portfolios caught in the recent coronavirus-fueled stock market selloff, ESG investment portfolios have fallen this year – but only by around half the broader market’s decline. That’s consistent with research from the world’s biggest investment manager, BlackRock, which is ramping up its own socially responsible investments.

ESG’s supporters might argue the group’s outperformance is because ESG-friendly businesses simply have better fundamentals than those in generic portfolios, thanks to policies that don’t damage the planet. And while it remains to be seen how true that is – there are other reasons those companies’ shares could perform well – it does seem like the exclusion of certain environmentally unfriendly companies has served them well…

Why should I care?

For markets: More like spoil companies.

Oil isn’t a feature of most ESG portfolios, which means they’ve avoided the significant losses caused by the tumble in oil companies’ stock prices this year. That’s been driven by the falling oil price: a barrel costs almost what it did in 2002. Lower demand for the black stuff amid declining economic growth is partly to blame, as is Saudi Arabia’s decision to flood the market in its price war with Russia. And when oil’s cheap, the world’s big producers can’t make as much selling it – which has led their stock prices to fall.

The bigger picture: Not as bad as you’d think.

ESG investors might actually be surprised to find some energy companies are technically a good fit for their portfolios: their polluting effects might, for example, be offset by the gender balance of their boards. In fact, according to ESG screening platform Arabesque S-Ray, the average energy company ranks 50 out of 100 on environmental, social, and governance measures – a score that puts them above the average finance firm.

Originally posted as part of the Finimize daily email.

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