Companies with high ESG ratings are delivering higher long-term risk-adjusted returns tan the market average, according to Macquarie Securities.
Since Macquarie started giving companies ESG ratings in 2011, high-scoring companies have outperformed low-scoring companies, with a relative outperformance of 3.8 per cent a year.
This year, Macquarie updated ratings for 227 companies. Governance includes assessments of the board and management, reporting and disclosure, executive remuneration, risks and controversies. Social includes assessment of employee management, supply chain and product, community and conduct. Environment includes environmental practices, environmental supply chain and products.
ASX 100 companies in the top ESG quintile are: Magellan Financial Group, Orora Ltd, Pendal Group, Dulux, CSL, Seek, Challenger, Janus Henderson, Aristocrat Leisure, IAG, Fortescue Metals, Reliance Worldwide, Medibank Private, Computershare, Mirvac Group, Transurban, ASX Ltd, Cochlear and REA Group.
Ex-100 companies in the top quintile are Wisetech Global, Kathmandu Holdings, OFX Group, Growthpoint Property, Smartgroup Corp, Super Retail, Perpetual, Platinum, NIB Holdings, IDP Education, Technology One, Bingo Industries, Genworth Mortgage, AFG, Arena REIT, Flexigroup, Steadfast Group, Asaleo Car Ltd, SCA Property Group, Ooh!Media, SG Fleet Group, Navigator Global, ALE Property Group, Invocare and Breville Group
Companies that are performing well on both ESG scores and analyst recommendations include Magellan Financial Group, packaging company Orora, investment manager Pendal Group, CSL, Janus Henderson, Fortescue Metals, Reliance Worldwide and Mirvac. CGF, MGR, REA, TCL
High-scoring stocks have also had lower volatility, giving investors the opportunity to enhance returns, manage risk and invest in companies with positive ESG profiles. The basket of stocks with the highest ESG scores had average volatility of 11 per cent, compared with 12 per cent for the second basket ad 14 per cent for the lowest ESG basket.
Disaggregating the scores, companies with high governance ratings consistently provide returns above the overall market, generating a 3.3 per cent excess annual return over the past five years. “The most quantifiable dimension is corporate governance as a means to assess the quality, credibility and trust in management, and we find it offers the greatest potential for investors,” Macquarie says.
Large cap companies with high social scores also provide superior returns. However, there was no statistical differentiation for small companies. “We believe this is likely to reflect the greater materiality of social issues to larger cap companies,” Macquarie says.
“For instance, generally they will have larger workforces for which human capital management factors will be a bigger differential, a larger corporate footprint with communities, more complex supply chain risk and greater scrutiny of conduct from regulators. This means that large companies that better manage their staff engagement, safety, have a positive relationship with its regulator or other social metrics will tend to outperform.
The correlation between environment scores as a signal for share price performance is less consistent but beginning to show outperformance.