Here is the third in a series of regular articles on current academic research into a range of responsible investment topics. The papers discussed were presented at the annual GRASFI  conference.
Compelling academic papers
Jane Ambachtsheer, global head of sustainability at BNP Paribas Asset Management, on this series:
“In 2017, the Global Research Alliance for Sustainable Finance and Investment was formed as a collaboration of universities committed to producing high-quality interdisciplinary research and curricula on sustainable finance and investment. This series highlights the 10 most compelling papers with ‘practitioner takeaways’ by BNP Paribas Asset Management investment professionals. We sponsor GRASFI to bring academic rigour to the pressing challenges of sustainable finance and investment. Our goal is to share these reflections with clients and the industry. We invite you to visit the GRASFI Conference website.”
When investors piled back into equities after the March 2020 ‘COVID crash’ on news of huge fiscal and monetary stimulus, it was notable that sustainable funds drew significant inflows on hopes of a ‘green recovery’.
As investment approaches using environmental, social and governance (ESG) factors grow more popular, understanding how assets perform during major market shocks is a key test of these strategies’ viability.
In the white paper ‘Sustainability in the time of uncertainty’, the authors analyse the performance of S&P 1500 companies during the crash. US stocks scoring higher on ESG factors had ‘significantly higher’ returns over the period, the study reports – particularly during the first ‘extreme’ days of the upheaval.
The paper reports a link between investor trust in sustainability factors and stock resilience, indicating that investors value companies with strong sustainability qualities in times of market stress.
By drilling into the ‘E’, ‘S’ and ‘G’ elements, the authors report that factors such as pollution prevention, staff pay and diversity have a particularly strong bearing on how individual stocks perform. In last year’s crash, companies scoring higher on these metrics outperformed the market average, demonstrating that these factors can strengthen resilience to market shocks.
The authors also surveyed groups of investors during bull and bear market conditions to assess attitudes to risk and uncertainty. Risk-averse individuals with access to ESG information were shown to be more likely to allocate more to equity during the crash than other risk-averse investors who were not given ESG information.
With more money than ever flowing into sustainable investments, the paper identifies behavioural factors and underlying drivers of company performance that show clearly that companies with strong ESG credentials can perform well in times of uncertainty.
Commenting on the paper, Alex Bernhardt, global head of sustainability research at BNP Paribas Asset Management, said:
“This paper highlights the positive link between companies with a strong sustainability performance and business resilience by evaluating share price performance during the COVID-19 pandemic. The authors found that companies with strong sustainability characteristics are considered lower risk investments – this is aligned with our view that a strong performance on material ESG issues can help companies mitigate risk.”
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
 The Global Research Alliance for Sustainable Finance and Investment is a worldwide network of 19 leading universities that was established in 2017 to promote rigorous academic research into finance and responsible investment. BNP Paribas Asset Management has been the asset management sponsor of GRASFI since 2018. Through its sponsorship, BNPP AM is able to access leading academic research into sustainable finance and investment, helping to inform the broader debate.