The sustainable investor for a changing world

Sustainability in the time of uncertainty


BNP Paribas Asset Management


Here is the third in a series of regular articles on current academic research into a range of responsible investment topics. The papers discussed were presented at the annual GRASFI[1] conference.

Compelling academic papers

Jane Ambachtsheer, global head of sustainability at BNP Paribas Asset Management, on this series:

“In 2017, the Global Research Alliance for Sustainable Finance and Investment was formed as a collaboration of universities committed to producing high-quality interdisciplinary research and curricula on sustainable finance and investment. This series highlights the 10 most compelling papers with ‘practitioner takeaways’ by BNP Paribas Asset Management investment professionals. We sponsor GRASFI to bring academic rigour to the pressing challenges of sustainable finance and investment. Our goal is to share these reflections with clients and the industry. We invite you to visit the GRASFI Conference website.”

Sustainability in the time of uncertainty

The COVID-19 pandemic had a profound and immediate effect on global stock markets. The US S&P 500 equity index fell by 33.6% between 20 February and 23 March 2020 in US dollar terms as lockdown measures were enacted across much of the developed world to contain the virus.[2]

As markets rebounded on news of huge fiscal and monetary stimulus from governments and central bank support, investors piled back into equities. It was notable that sustainable funds drew significant inflows[3] on hopes of a ‘green recovery’.

As investment approaches centring on environmental, social and governance (ESG) factors grow more popular, understanding how assets perform in adverse market conditions is a key test of the viability of these strategies.

In the white paper ‘Sustainability in the time of uncertainty, the authors have analysed the performance of S&P 1500 companies during last year’s crash.

US stocks scoring higher on ESG factors by rating agencies OWL Analytics and TruValue Labs demonstrated ‘significantly higher’ returns over the period, the study reports – particularly during the first few ‘extreme’ days of the market turmoil.

Sustainability components

The study decomposes ESG scores based on three ‘components’ to explain performance:

  • Uncertainty
  • Investor sentiment
  • ‘Idiosyncratic sustainability factor’.

The last of these was the strongest factor, the authors report.

To analyse uncertainty, the authors use the ‘Knightian uncertainty’ measure to differentiate between risks and ambiguities. Knightian uncertainty explains situations in which information is known, but the outcome is not, and situations in which not all information is available[4] – effectively, ‘known unknowns’ and ‘unknown unknowns’.

The study plots ESG scores against nine measures of risk and uncertainty based on data from January 2017 to June 2019. Of these, seven demonstrate a ‘clear pattern’, namely that stocks rated the highest for ESG qualities ‘on average exhibited less risk ex post than the lowest rated ESG stocks’.

The authors also report a link between investor trust in sustainability factors and stock resilience, indicating that investors value companies with strong sustainability qualities during times of market stress.

This is based on two analyses of ESG scores and company performance, one controlling for financial performance metrics linked to ESG factors, and the other for risk and sentiment measures.

Those companies with higher ESG scores usually demonstrate lower risk and higher sentiment scores, with the risk element the more obvious factor, the authors report.

The idiosyncratic sustainability factor

On top of the risk and sentiment factors, there is a third residual factor identified by the researchers feeding into performance during crisis periods.

By drilling down into the various elements of ‘E’, ‘S’ and ‘G’, the authors report that individual factors have a particularly strong bearing on the performance of individual stocks. These include companies’ performance on

  • Pollution prevention
  • Staff pay and job satisfaction
  • Diversity and workers’ rights.

During February-March this year, companies with higher scores on these metrics are shown to have performed better than the market average, demonstrating the role these factors play in a company’s resilience to market shocks.

“Overall, these results suggest that the residual ESG component carries important information regarding firms’ sustainability conduct, particularly in the governance space, that cannot be explained with market risk or sentiment,” the authors state.

The authors put their findings to the test through experiments with groups of investors tested during bull and bear market conditions – 23-30 November 2019, and 13-20 March 2020.

The tests were designed to assess attitudes to risk and uncertainty. They included one group of investors given financial information and another given additional sustainability information.

Before the 2020 crash, there was no difference between the two groups, but when tested last March, participants clearly preferred lower risk investments.

In addition, risk-averse individuals with access to ESG information were shown to be more likely to allocate more to equity during the market plunge than other risk-averse investors who were not given ESG information.

This latter finding is in line with the idea that companies with higher ESG scores are seen as lower risk investments.

At a time when more money than ever before is flowing into sustainable investments, the paper identifies behavioural factors and underlying drivers of company performance that show clearly that companies with strong ESG credentials can perform well in times of uncertainty.

Commenting on the paper, Alex Bernhardt, global head of sustainability research at BNP Paribas Asset Management, said:

“This paper highlights the positive link between companies with a strong sustainability performance and business resilience by evaluating share price performance during the COVID-19 pandemic. The authors found that companies with strong sustainability characteristics are considered lower risk investments – this is aligned with our view that a strong performance on material ESG issues can help companies mitigate risk.”

Also read these blog articles on ‘GRASFI papers’:

More on sustainable investing

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

[1] The Global Research Alliance for Sustainable Finance and Investment is a worldwide network of 19 leading universities that was established in 2017 to promote rigorous academic research into finance and responsible investment. BNP Paribas Asset Management has been the asset management sponsor of GRASFI since 2018. Through its sponsorship, BNPP AM is able to access leading academic research into sustainable finance and investment, helping to inform the broader debate.

[2] Source: FE Analytics

[4] Knightian uncertainty definition sourced from MIT News Office:

On the same subject: