End of Week Notes

ESG and the pandemic: latest research

Sustainable funds didn’t outperform but they held up well enough in April’s bounce

Jon Hale
The ESG Advisor
Published in
5 min readMay 1, 2020


Markets rebounded from their March lows in April, although the latest statistics on GDP and unemployment claims seem to have brought market optimists back down to earth. I thought the following chart from The New York Times this week, was downright chilling. It shows the impact, so far, of the pandemic on the services sector. Compare this year’s first quarter (and the damage was concentrated mostly in just the last half of March) to the 2008 financial crisis.

Source: New York Times, Bureau of Labor Statistics

Virtually the entire range of what we consider the service economy has been devastated, but especially restaurant, childcare, and gig-economy workers. And those that are still working in hospitals, nursing homes, and grocery stores face unprecedented danger to their health, even as they provide essential services. A lot of these same folks have been left behind in the global economy of the past several decades. Something’s got to change. We need a better social safety net and we need corporate leadership to help rebuild our economy into one that works for everyone, not just for the wealthy and educated elites.

Sustainable funds hold their own in April

In any event, on to a more prosaic topic. I’ve been following the performance of sustainable funds during the downturn. These funds outperformed during the first quarter, evidenced by their over-representation in the top halves and top quartiles of their Morningstar categories. The returns of 70% of sustainable equity funds finished in the top half of their category for the quarter. The returns of 44% of sustainable equity funds finished in the top quartile while those of only 11% finished in the bottom quartile.

So what happened in April, when markets recovered some of their first quarter losses by posting double-digit gains? Sustainable funds held their own, with 45% finishing top half and 55% bottom half.

Source: Morningstar Direct

That’s a bit better than I would have expected given their first-quarter bear-market showing. With markets still down significantly for the year, their year-to-date category ranks remain unchanged, with 70% still in the top half of their category and a 43:11 ratio of top-quartile to bottom-quartile funds.

MSCI: ESG stock tilts powered ESG indices’ outperformance in Q1

The other component of my first-quarter review of sustainable funds was an evaluation of ESG index returns. I found that 24 of 26 turned in less negative returns than the conventional indexes to which they are most similar in terms of market coverage. Based on attribution analysis, the biggest reason was what I called ESG stock selection, the tilt in these portfolios toward companies with better ESG assessments and ratings. (Energy underweights were secondary.)

Quite a few of those ESG index funds are based on MSCI ESG indexes, so it was interesting to see this MSCI post this week examining ESG index performance:

The analysis was of four indexes based on the MSCI ACWI:

  • MSCI ACWI ESG Universal
  • MSCI ACWI ESG Leaders

All four indexes, by the way, beat the MSCI ACWI for the first quarter and also for three- and five-years through March 31st. The authors found that a significant portion of the indexes’ performance in the first quarter “was attributable to the systematic tilt of these indexes toward higher ESG-rated stocks.” Conclusion:

The positive contribution from the ESG factor, though over a limited period, supports our previous research where we found certain high ESG-rated companies were less exposed to systematic risks such as exogenous shocks. The coronavirus crisis is a recent example of such a shock.

Research: Companies valuing stakeholders during pandemic had higher institutional flows and less negative returns

I wrote a couple weeks ago that corporations have no choice but to prioritize their stakeholders given the gravity of this crisis. But the standard view of shareholder-focused management suggests that cutting costs is the necessary response required so the company can protect shareholders and live to fight another day. Investors, in this view, might be expected to punish companies that prioritize stakeholders rather than cut costs.

On the other hand, while companies may be disposed toward cost-cutting, the magnitude of the crisis has focused so much media attention on corporate actions that companies cutting costs and laying off workers face significant reputational risks in doing so. Never before has so much information about corporate actions been so widely available and disseminated in traditional media, on the Internet and social media. It seems obvious given today’s media environment that having a reputation as a “corporation behaving badly” could do harm to the firm’s stock price during the crisis, not to mention hinder the firm’s longer-term prospects. Yet firms lacking built-in resilience may have no choice but to go the cost-cutting route.

New research from Harvard professor George Serefeim and associates addresses this question. They looked at whether companies seen as prioritizing workers during the first stages of the pandemic experienced higher institutional money flows and less negative returns.

We study the association between corporate responses we see as plausibly important during this crisis, specifically related to labor practices, supply chain and operations, to determine whether companies with more positive sentiment around their response to the crisis experienced higher institutional money flows and less negative returns during the coronavirus pandemic.

Our hypothesis is that firms with more positive public sentiment for the way they respond to the COVID-19 crisis and their effects on employees, suppliers and broader society will experience higher institutional money flows and outperform their counterparts during the market collapse.

Using data from Truevalue Labs assessing sentiment across thousands of news sources, such as traditional media, blogs and industry publications, Serefeim and his co-authors found that companies with more positive sentiment and higher levels of media coverage around their labor, supply chain and operating responses to the crisis indeed experienced higher institutional money flows and less negative returns. The study covered the period from Feb. 20 to March 23.

Coming this week: Morningstar Sustainable Investing Quarterly Webinar, Thursday, May 7th, 10 a.m. CT

Register here

Our topic is Stakeholder Capitalism and I’ll have Martin Whittaker, CEO of JUST Capital as my guest. We’ll talk about the shift towards a focus on stakeholders and the importance of sustainable investors in helping bring it about. Thursday, May 7 at 10 a.m. CT.

Follow me on Twitter @Jon_F_Hale



Jon Hale
The ESG Advisor

Global Head, Sustainable Investing Research, Morningstar. Views expressed here may not reflect those of Morningstar Research Services LLC. or its affilliates.