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US ESG (Environmental, Social and Governance) investors are increasingly likely to benefit as the country’s companies close the gap with best-in-class global companies on ESG disclosure and performance. The trend towards ESG in the United States is being driven by asset owners demanding ESG integration into corporate business strategies, investors using it as a source of alpha, and regulators looking to formalize ESG into its rules and protocols. A growing body of empirical evidence suggests that companies with improving ESG momentum have been correlated with positive risk-adjusted returns. These ESG improvers are companies with solid business fundamentals that are demonstrating positive momentum in addressing ESG risks and opportunities. We believe that an investment focus on firms, combined with an emphasis on sustainable, high-quality business models, can potentially uncover unique sources of alpha and deliver consistent outperformance for active equity investors.
Key observations:
- Through the first half of 2020, the United States lagged other countries and regions in ESG, based on ESG ratings by major ratings providers.
- Momentum has been building in US firms closing the gap with the best-in-class ESG firms globally.
- There is increasing evidence to suggest that improving ESG momentum at US companies can drive positive risk-adjusted returns, thus, all else equal, providing key support to an investment case for being ahead of the curve by investing in ESG improvers.
- If Joe Biden wins in November and the Democrats sweep Congress, we expect a sharp acceleration in US ESG leaders and improvers relative to global peers.
- We believe that integrating ESG criteria into an investment strategy and a focus on sustainable, high-quality business models will be advantaged by an improving ESG landscape, as there is a close relationship between ESG and earnings quality.
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