Research in recent years has found that socially-responsible investments do not, on average, perform worse than their traditional counterparts, measured with stock price returns. 1

Has this research held up in 2020, during Covid-19 and the struggle for racial justice? How have socially-responsible companies performed financially?

We compared stock price returns over the past 6 months for ~4,700 companies with impact ratings on 45 causes (ranging from Climate Action to Racial Justice to Gender Equality). Here are some of the results:

Mental health impact had the strongest correlation with stock price returns over the past 6 months

6-month average stock price returns for top- and bottom-rated companies on Mental Health impact
Impact index 2 6-month return 3
Mental Health Top 50 +8.06%
Mental Health top 200 +5.07%
Mental Health Bottom 50 +0.59%
Mental Health Bottom 200 -12.2%

Mental Health impact scores had the highest correlation with 6-month average stock price returns of any cause (10.9% correlation across all sectors). Companies that do more for the mental health of their employees (and generally treat their employees well) have outperformed their peers, on average, during Covid-19.

This could be due to several factors. Workers that believe their employer treats them well are less likely to leave their job (resulting in less turnover costs for the employer). When employees feel their well-being and that of their family is secure, they are able to continue focusing on work (and vice versa when they feel their well-being is in peril). This is perhaps especially true during a pandemic.

In the Finance sector (see below), for example, the highest correlations between stock price return and impact score were Child and Maternal Health (13.0%), Quality Primary Education (11.3%), Mental Health (10.9%), Zero Hunger (9.7%), and Decent Work (9.1%).

Impact scores for these causes are based on metrics such as quality of employee benefits, policies supporting working mothers, employee ratings of the company, percent of employees making a living wage, and worker safety fines.

More sustainable companies in energy-dependent sectors outperformed peers

Climate change is a material cause for transportation, energy and utility sectors, since producing, delivering or using fuel is a significant part of the cost structure for companies in these sectors. Companies that are more energy efficient generally have both a financial advantage and less of an impact on the climate.

Using the energy sector as an example (see figure below), the highest correlations between stock price return over the last 6 months and impact score were for the following causes: Renewable Energy (26.7% correlation), Sustainable Use of Natural Resources (26.0% correlation), Innovation (21.9% correlation), Climate Action (19.6% correlation), and Reduced GHG Emissions (16.1% correlation).

Given how hard Covid-19 has hit industries like travel and fossil fuels over the last 6 months, these correlations are not surprising. With the global economy still heavily dependent on fossil fuels, it seems likely that fossil fuel companies will recover in the next several years.

In the longer term, however, accelerating climate change makes it very possible that greater sustainability scores will be strongly correlated with financial and stock performance.

Innovative companies outperformed peers in several sectors, including Healthcare and Services

Innovation does not necessarily mean greater stock price return. R&D can be expensive, and companies in industries not known for innovation (for example, infrastructure, utilities, or REITs) can outperform other stocks, especially over the long term.

Some industries, however, are experiencing greater levels of disruption, and more innovation over the past 6 months has correlated with stronger financial returns.

For example, in the Services sector (below), the two highest correlations between stock price and impact score were Innovation (17.1%) and Free Flow of Information (16.44%). Innovation also had the highest correlation with stock price in Healthcare, Consumer Goods, Real Estate, and Transportation over the past 6 months, perhaps highlighting the impact of additional disruption due to Covid-19.

Investing in companies that align with your values won't necessarily lead to better or worse returns, and there are many reasons to invest in a company or fund (only one of which is financial return).

Based on performance so far in 2020, investors may be able to improve their chances of achieving both social and financial return by focusing on causes that are most material for each industry in the current global context.

Disclaimer: this content is for informational purposes only, you should not construe any of this material as legal, tax, investment, financial, or other advice. Nothing contained on our site constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments.