Re-evaluated performance of 100 most sustainable companies per Barron’s in line with S&P 500

The Bottom Line:  Re-evaluated performance of the 100 most sustainable companies per Barron’s produced 2019 returns in line with S&P 500 Index—no more, no less.

Performance of the 100 most sustainable companies per Barron’s/Calvert Research and Management
A lead article in the February 10, 2020 edition of Barron’s entitled “Sustainable Success:  Stocks That Are Delivering for Investors and the Planet” includes a listing of the 100 most sustainable companies based on 2020 ESG scores.  Barron’s makes the case, based on a ranking score derived by looking at more than 230 indicators provided by Calvert Research and Management,  that these companies outperformed the market cap weighted S&P 500 by 2.8% in 2019. Yet, upon closer examination this may not actually be the case as the original universe of 100 companies, excluding mergers and acquisitions, more likely performed in line with the S&P 500 in 2019. Based on this outcome, a stronger case can be made that investors can adopt a sustainable investing[1] strategy without necessarily having to give up financial returns.

Sustainable investing gains momentum, as mutual funds and ETFs reach $1.8 trillion
It’s clear that sustainability is gaining momentum, whether in sustainable finance, investing strategies, ESG disclosures and data or the adoption of sustainable practices on the part of companies and governments, to mention just a few.  Even according to research conducted by Sustainable Research and Analysis using the prism of US mutual funds and ETFs, assets sourced to sustainable investing reached another new high of $1.8 trillion at the end of January.  In the process, there is also growing confusion and hype around financial and non-financial impacts.

Performance of the 100 most sustainable companies in 2019 more likely in line with S&P 500
Barron’s is contributing to the hype that sustainable investing can lead to better stock performance results (and in other articles, mutual fund and ETF returns).  In its lead article last week, Barron’s makes the case that 100 equally weighted companies with the highest ESG scores, as calculated by Calvert Research & Management, outperformed the market cap weighted S&P 500 by 2.8% in 2019.  Setting aside the lack of disclosure as to Calvert’s ESG metrics, scoring methodology and outcomes that limits further analysis, Barron’s conclusion seems to be based on the application of these ESG scores retroactively to a reconstituted universe of 100 firms that includes 28 new companies added to the 2020 rankings.  Then, their arithmetic average performance results for 2019 is calculated and compared to the S&P 500.  This approach produced an average return of 34.3% versus the S&P 500 return of 31.5% in 2019.  However, if the prior year’s 100 highest ESG scoring companies were fixed and not reconstituted, excluding four companies that were involved in mergers and acquisitions, the 2019 average performance results for these firms is actually 31.7%.  This is just about in line with the S&P 500 but, to be fair, slightly above the 29.24% posted by the equally weighted S&P 500 companies in 2019.   This is due to the performance lift provided by the 28 newly added companies that on average posted a return of 39% versus an average 2019 return of 29.7% associated with the stocks of companies removed from the 2020 ranking list, excluding 4 firms that were involved in mergers and acquisitions during 2019.  Refer to Chart 1.

Conclusion:  A case can be made that investors can adopt a sustainable investing strategy without necessarily having to give up financial returns        
Rather than touting outperformance which admittedly some research supports but may be too soon to correlate with high ESG scores and, in the end, may be influenced by any number of factors outside ESG, it may be more constructive at this juncture to advance the notion that investors will likely be no worse off by directing their investments toward sustainable companies—however these may be defined.

[1] While the definition continues to evolve, sustainable investing refers to a range of overarching investing approaches or strategies that encompass values-based investing, negative screening (exclusions), thematic and impact investing, environmental, social and governance (ESG) integration, company engagement and proxy voting.  These are not mutually exclusive.