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Bank of America Says Buyers Pay Up for Top-Ranked ESG Firms

Solar panels stand in an aerial photograph taken over the Enel Green Power Mexico Don Jose photovoltaic solar plant in San Luis de la Paz, Guanajuato state, Mexico, on Wednesday, Aug. 14, 2019. Energy reforms begun in 2013 opened the door to private investment and specifically promoted clean energy via competitive power auctions, but new plans to strengthen state control under Mexico's President Lopez Obrador, potentially at the expense of the private sector, are forcing a change of course.

Stocks with high environmental, social and corporate governance scores have outperformed the broader market and traded at higher valuations this year, according to Bank of America Corp.

During the first quarter’s selloff, S&P 500 members in the top quintile of ESG rankings beat the index by more than five percentage points, the lender said. Meanwhile, investors have also begun to pay less for stocks with lower ESG scores, with relative valuation premia rising on those deemed more socially responsible.

“Good ESG companies typically have better return on equity, lower earnings volatility and lower share price volatility,” Sameer Chopra, head of Asia ESG research at Bank of America, said at a briefing Wednesday. This year the ESG stocks that have grabbed investor attention include those focused on employee health and safety, he added.

Flows into ESG strategies were four times higher than the “historical run rate” of money going into such funds this year through July, Bank of America reiterated, reaching as high as $4 billion in some weeks this year.

The MSCI Asia Pacific Index’s members with the top 20% of ESG scores by the index compiler were trading at forward price-to-earnings ratios that were five points higher than peers at the bottom quintile at the end of 2019, up from the two-point gap in 2017, Chopra said. Asian companies with below-median emissions were trading at multiples that were about two points higher than their peers.

Meanwhile, the cost of debt for S&P 500 companies in the top decile of ESG scores was also lower by almost 200 basis points than those in the bottom decile in 2019, the bank found. Still, Chopra warned that even companies that have high ESG scores could potentially be negatively affected by carbon taxes. Due to their high carbon exposure and low margins, industrials and airlines stocks in Asia could see earnings being hit, he said.

The global push into ESG investing has gathered pace this year as governments channel virus-related recovery funds into health and environmental projects. Asset managers including BlackRock Inc. have touted the performance of their ESG investments as a shield against volatility and price declines. Still, some academic research has raised doubts about outperformance theories based on ESG scores, citing more traditional metrics such as leverage and intangible assets as reasons for returns.

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