"Responsible" companies are growing faster than the market. On the other hand, they may not be well prepared for war

A comparison of the performance of companies that dominate the global ESG (sustainability, responsibility) rankings over the past three years shows their above-average profitability in growth years. Conversely, during the crisis that took the world by surprise with Russia's war on Ukraine, these "ESG" companies lost more value than the market as a whole.

The annual performance of the MSCI World ESG Leaders Index reached 26% in December 2023. Thus, the group of valued socially responsible companies, which MSCI includes players such as Microsoft, Nvidia, Alphabet, Johnson & Johnson and Tesla, outperformed the MSCI General Parent Index by more than two percentage points, or outperformed by almost 10%.

Among the main reasons, analysts say that companies managed strictly according to ESG criteria show better resilience in times of market fluctuations. Another is the growing interest and pressure from investors themselves to ensure that their investments comply with these criteria. Thus, over the long term, we observe that different versions of ESG indices are able to outperform their parent indices. But can this be true forever?

Market value development of the MSCI World ESG Leaders and MSCI World indices (%)

Snímek obrazovky 2024-02-14 v 10.40.36

Source:Wonderinterest Trading based on MSCI.com data

Serious doubts were raised by 2022, which was a challenging and turbulent year not only for the markets as a whole, but more dramatically for the value of the MSCI World ESG Leaders Index. In a year that saw the outbreak of war in Ukraine and the height of the energy crisis, the index wrote off more than 19%, recording a nearly one and a half percentage point greater decline in value than its general parent index.

From an analysis of the financial statements and financial reports, we cannot distil a clear explanation for this stumble. Sustainability reports and other strategic documents of the companies should also be taken into account. This is not in order to enjoy 'success stories' in the philanthropic sector, but above all to find out where the centre of gravity lies in the strategic priorities in which companies are investing and with which they want to hedge against the turbulence of the future.

The leading global players in the MSCI World ESG Leaders Index approach sustainability strategy in different ways. For some, climate change and the risks and opportunities associated with it are the cornerstone of their activities. Microsoft and Alphabet are even more focused on climate change as part of their corporate social responsibility than on areas related to the direct market and customer impacts of their strong market power, i.e. regulatory issues.

The second approach, as seen at Johnson & Johnson, Lilly or Home Depot, inherently links sustainability to business goals. An extreme case in this respect is Tesla, where sustainability goals are almost 100% intertwined with business goals, i.e., for example, the company says its contribution to climate protection is equal to its forecast of future electric car sales.

However, the sustainability strategies of these large global companies still do not reflect the huge geopolitical challenges and risks that have emerged in recent years. To put it simply, while all the leading actors are flexing their agility in climate policy, the possibility of global war shocks is overwhelmingly avoided in their strategic plans.

Yet the risk is well known to the corporate sector as a whole. For example, EY's 2024 Geostrategic Outlook report clearly states that the corporate sector's perception of geopolitical risk, as measured by the number of times it is mentioned in corporate materials, has jumped higher since 2022 than it was before the Russian invasion of Ukraine.

From the investors' perspective, it is becoming evident that they will continue to view "their" companies as sustainable not only in terms of their concern for protecting the planet or employee diversity. They will also be interested in diversity and supply chain security, including access to raw materials. And they will be interested in flexible preparedness for crisis events, including threats and opportunities such as government regulation or procurement arising from the needs of the 'war economy'.

This text constitutes marketing communication. It is not any form of investment advice or investment research or an offer for any transactions in financial instrument. Its content does not take into consideration individual circumstances of the readers, their experience or financial situation. The past performance is not a guarantee or prediction of future results.

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