‘Woke’ investment falls short in pandemic volatility

It has been accepted wisdom for some time that companies that adhere to the ESG rules — standards associated with environmental regulation, social responsibility and corporate governance — deserve a premium over other, more conventional corporations.

Lots of consultant hours have been clocked up that supposedly show that ESG adherents enjoy a share price premium because investors demand higher levels of governance in these “woke” days. Many companies have a special ESG annual report that analyzes their performance in these areas, and no investor presentation is complete without at least one slide on ESG, and often a whole separate presentation.

But now comes new research that suggests this not necessarily the case. In fact, it seems, when the chips are down and backs against the wall, investors revert to old-fashioned values such as cash and asset-backing as their criteria for making the stock a “buy” or a “sell.”

In particular, in the difficult investment decisions of the past six months, when institutions and individuals were faced with the worst economic outlook for many decades, most went for the reliability of older financial models than the glamor of ESG.

A team of American academics has crunched the numbers in a recent research paper and concluded: “ESG didn’t immunize stocks against the COVID-19 market crash.”

Maybe this is not a great surprise. In March, when global stock markets lost as much as 30 percent of their value in a couple of weeks, selling was so widespread across the board that nobody — not even mighty Apple — was immune from the sell fever.

But, the authors found, good ESG credentials did nothing to make the stocks more attractive in the Fed-fueled recovery that followed the April carnage and which has lasted ever since.

In the difficult investment decisions of the past six months, when institutions and individuals were faced with the worst economic outlook for many decades, most went for the reliability of older financial models than the glamor of ESG.

Frank Kane

“ESG is insignificant in fully specified returns regressions for the first quarter of the COVID crisis period, and is negatively associated with returns in the market’s recovery period in the second quarter of 2020,” the report said.

In layman’s language, this means that having good intentions on ESG made no difference in the bad times, and were an actual discouragement when things got better — not what the ESG lobby, and the consultants that live off it, want to hear.

Instead, and excuse the academic-speak again, “industry affiliation, market-based measures of risk, and accounting-based variables that capture the firm’s financial flexibility (liquidity and leverage) and their investments in internally developed intangible assets together dominate the explanatory power of the COVID-19 returns models.”

In other words, investors made their decisions over the past six months based on their opinion of the sector in relation to the pandemic (Amazon versus Hilton Hotels, for example), how well the company ran its finances and how much cash it had in the bank (Google versus virtually any quoted airline), and brand strength (AstraZeneca versus Debenhams).

“We conclude that celebrations of ESG as an important resilience factor in times of crisis are at best, premature,” the report concluded.

One big investor for whom ESG has never been a lodestone is Warren Buffet, the “sage of Omaha” who has made billions out of investing in conventional companies that he essentially understood. “Beware the investment activity that produces applause; the great moves are usually greeted by yawns,” is one of his many amusing investment dicta.

Buffet recently announced he was going big in Japanese stocks, with $6 billion invested in some of the country’s big blue-chip names in commodities trading, finance and conglomerates. It is a massive vote of confidence in the prospects for Japanese economic recovery after many years in the doldrums, and in conventional investing.

Japan is not a country known to have been overwhelmed by the ESG fad, so Buffett’s decision is another example of the back-to-basics approach. Time will tell, but he will probably end up yawning all the way to the bank.

• Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai