Stocks of companies rated highly for their sustainability efforts have registered record gains this year, boosted by growing awareness and investor interest in investments focused on environmental, social and governance issues.
Data show MSCI World ESG Leaders Index has risen 19.5 per cent so far this year (in U.S. dollar terms), compared with the MSCI World Index’s return of 15.3 per cent.
Analysts said this outperformance should boost the confidence of investors who are concerned about the ability of ESG stocks to provide higher returns.
Meredith Jones, partner and ESG expert at Aon said the outperformance of MSCI World ESG Leaders index should drive fund inflows into ESG stocks next year.
“There are demographic, sentiment and regulatory shifts that are also driving investors towards higher ESG investments. I don’t expect these trends to abate in the near term,” she said.
According to Morningstar data, global sustainable funds have already hit a record inflow of $508 billion in the first three quarters of this year. Their assets under management swelled to a staggering $3.9 trillion at the end of September.
Global firms have been taking active steps to cut down their emissions and to diversify their board rooms to improve their ESG scores, as fund managers have started to focus on such disclosures.
Due to the rise in demand, shares of the firms with higher ESG scores have risen much higher than those with lower ESG scores in recent months.
A Morningstar report this month showed shares of companies with low ESG risks are trading at a 7% premium to fair value, while stocks with severe and high ESG risks trade at 16% and 8% discounts to fair value respectively.
The rally in ESG shares have also lifted their valuations overall, making them more expensive.
The MSCI ESG Leader index’s forward 12-month P/E ratio stood at 21.1 at the end of last month, compared with MSCI World index’s 18.4.
“While savvy ESG investors will be mindful of their overall asset allocation, ... they may well be willing to increase the portion of that existing stock exposure to ESG, even if at the high end of valuations, given the shift in attitude and increased popularity of values-based investing,” said Manisha Thakor, founder at MoneyZen.
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