ESG Investing Doesn't Look Like a Bubble. It's Something Else, Analyst Says

Alexandra Scaggs Sustainable Investing Trusts/Funds/Financial Vehicles Alternative Investments Financial Services Investing/Securities Sustainable Investment Analysts' Comments/Recommendations Corporate/Industrial News Corporate Social Responsibility Environmental/Social/Governance Political/General News Natural Environment Sustainable Development/Sustainability Content Types Factiva Filters C&E Exclusion Filter C&E Executive News Filter I/FIS I/IAV M/FCL N/AIN N/ANL N/ARG N/CNW N/DJN N/ENV N/GEN N/WER Barrons.com Barrons Blogs Wires CODES_REVIEWED Alternative Investments Sustainable Investing author Alexandra Scaggs author|Alexandra Scaggs topicid 8576 name Alexandra Scaggs extractedtext Alexandra Scaggs rank 1 codetype author code alexandra_scaggs nameformat surname_first author Alexandra Scaggs id Alexandra Scaggs barrons_display_subject BARSUST barrons_display_subject|BARSUST codetype BARRONS_DISPLAY_SUBJECT canbedisplaysubject true value BARSUST source MANUAL status modified name Sustainable Investing code BARSUST djn I/FIS djn|I/FIS name I/FIS why lineage source FACTIVA fcode I/FIS codetype djn code i_fis djn N/AIN djn|N/AIN name N/AIN why lineage source FACTIVA fcode N/AIN codetype djn code n_ain djn M/FCL djn|M/FCL name M/FCL why lineage source FACTIVA fcode M/FCL codetype djn code m_fcl djn I/IAV djn|I/IAV name I/IAV why lineage source FACTIVA fcode I/IAV codetype djn code i_iav djn N/ANL djn|N/ANL significance prominent name N/ANL why about source FACTIVA fcode N/ANL codetype djn code n_anl onlinesignificance prominent djn N/ARG djn|N/ARG significance prominent name N/ARG why about source FACTIVA fcode N/ARG codetype djn code n_arg onlinesignificance prominent djn N/CNW djn|N/CNW name N/CNW why lineage source FACTIVA fcode N/CNW codetype djn code n_cnw djn N/GEN djn|N/GEN name N/GEN why lineage source FACTIVA fcode N/GEN codetype djn code n_gen djn N/ENV djn|N/ENV name N/ENV why lineage source FACTIVA fcode N/ENV codetype djn code n_env djn N/DJN djn|N/DJN codetype djn value N/DJN source DJN-CONTROL status modified inactivebydefault true name N/DJN code n_djn djn N/WER djn|N/WER codetype djn value N/WER source DJN-CONTROL status modified inactivebydefault true name N/WER code n_wer editorial-seo-id esg-bubble-sustainability-investing-europe-bernstein-stocks-outperformance-51580936461 editorial-seo-id|esg-bubble-sustainability-investing-europe-bernstein-stocks-outperformance-51580936461 first_publish_headline There’s No Evidence of an ESG ‘Bubble,’ Analyst Says. 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Something Else Is Going On. There’s No Evidence of an ESG ‘Bubble,’ Analyst Says. Something Else Is Going On. There’s No Evidence of an ESG ‘Bubble,’ Analyst Says. Something Else Is Going On.

It isn’t clear that companies’ sustainability ratings are a reliable way to predict their stocks’ outperformance, according to Bernstein Research.

ESG Investing Doesn’t Look Like a Bubble. It’s Something Else, Analyst Says

It isn’t clear that companies’ sustainability ratings are a reliable way to predict their stocks’ outperformance, according to Bernstein Research.

https://www.barrons.com/articles/black-rock-ceo-larry-finks-letter-tackles-climate-change-51579002558 mailto:alexandra.scaggs@barrons.com There’s No Evidence of an ESG ‘Bubble,’ Analyst Says. Something Else Is Going On. By Alexandra Scaggs Photograph by Alfred Kenneally Is there an ESG Bubble? Bernstein Research tried to find out.

More investors are using a lens of environmental, social and governance responsibility in their decisions, an approach called ESG investing.

But it still isn’t clear that companies’ sustainability ratings are a reliable way to predict their stocks’ outperformance, according to Bernstein Research. And as ESG investing becomes more popular, the firm’s strategists often “hear in passing many clients concerned about ‘ESG bubbles’ forming.”

So Bernstein took a closer look at the performance of stocks with the highest—and lowest—sustainability ratings. They found that the trend is strong in Europe, and said in a Wednesday note that it should persist.

To determine the staying power of sustainability investing, they asked two main questions: Can ESG ratings explain a stock’s performance? And if there is outperformance, is it the result of faddish crowding?

Bernstein sorted global stocks by their Sustainalytics rating—the most widely available metric—and looked at the relationship between stocks’ valuation and ESG rating. Sustainalytics measures ratings relative to a company’s sector, so it doesn’t account for entire sectors deemed unsustainable, such as tobacco or fossil fuels.

The trend is clearest in European stocks, but it doesn’t seem to be caused by investors crowding into the best companies. Instead, Bernstein found that the companies with the worst ESG ratings are trading at a discount. European companies with the fastest deterioration in their ESG metrics were also cheap.

“The discrimination in pricing within sectors looks more like a derating for the ‘worst in class’ stocks, rather than a bubble forming for the ‘best in class,’” the strategists wrote.

They also tested whether the higher-rated ESG stocks were simply better-quality than their peers. But they found that poor ESG ratings weighed down valuations for European stocks more than low return on equity (their chosen gauge of quality).

In the U.S., the strategists found a murkier relationship between sustainability ratings and stock-market performance.

“There is much more of an ESG effect in Europe currently than in the U.S.,” they wrote. But in Europe, at least, “the bottom line is that this [ESG] wave does not appear to be going away anytime soon.”

Write to Alexandra Scaggs at alexandra.scaggs@barrons.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.