Macquarie Securities has released its annual ESG Ratings Survey, confirming that ASX-listed companies with high ESG scores are outperformers.
Since Macquarie started giving companies ESG ratings in 2011, high-scoring companies have outperformed low-scoring companies, with a relative outperformance of 4.2 per cent a year. The stocks with the highest ESG scores have higher returns and lower volatility.
Macquarie says: “Based on the relative performance outcomes, we conclude that Macquarie’s ESG scores can be used as a screen for improving selectivity of both outperforming and underperforming stocks.”
The survey rates 231 stocks, which account for 87 per cent of the market capitalisation of the S&P/ASX 300 Index.
S&P/ASX 100 companies that made it into the first quintile include CSL, Magellan Financial Group, Carsales.com, Altium, Pendal Group, Seek, Nine Entertainment, Amcor, Sydney Airport, REA Group, Fortescue Metals Group, Bluescope Steel, Cleanaway Waste, Transurban, ASX Ltd, OZ Minerals, Xero, Stockland and Downer EDI.
Macquarie says CSL and Magellan are outliers, with scores significantly above the average.
Three companies moved out of the first quintile in the latest survey: Challenger’s score was cut on governance issues coming out of the Hayne Royal Commission; IAG was also cut on governance issues; and Reliance Worldwide was cut after the chair sold a substantial chink of shares.
Westpac, Link Administration Holdings and Woolworths dropped into the bottom quintile.
Macquarie says changes to scores are an “important signal” for investors, with revisions acting as a strong predicter of returns.
Macquarie says top 100 companies that scored well on ESG ratings and are currently rated highly by analysts include ALS Ltd, Amcor, CSL, Cleanaway, Fortescue, Nine Entertainment, Qantas, Sydney Airport and Xero.
Companies that did not perform well on either ESG or analysts’ ratings include Bendigo and Adelaide Bank, Bank of Queensland, Cromwell Property, Dacian Gold, HUB24 Ltd and Regis Healthcare.
Among companies outside the S&P/ASX 100, those that made it into the first quintile include IDP Education, Bingo Industries, Sandfire Resources, Monadelphous Group, FlexiGroup, Perpetual, Janus Henderson, Kathmandu Holdings, Technology One, Independence Group, Invocare, Growthpoint Property, SCA Property Group, Costa Group, HT&E Ltd, Bapcor Ltd, Platinum Asset Management, Pinnacle Investment, Australian Finance Group, Sims Metal, Western Areas Ltd, Genworth Mortgage Insurance, Infigen Energy, Arena REIT, Aventus Group and Myer Holdings.
Macquarie says that among the three components of an ESG score, governance provides the strongest link to performance. It says: “The most quantifiable dimension is corporate governance as a means to assess the quality, credibility and trust in management, and we find it offers the greatest potential for investors.”
Governance issues covered in the analysis include the composition and effectiveness of the board; management capability; the quality of reporting and disclosure, and other shareholder communication; executive remuneration; capital management; controversies or disputes involving such things as product safety, conduct and business ethics, bribery and corruption, political donations, accounting and taxation.
It says the correlation between environment scores as a signal for share price performance “is less consistent but beginning to show outperformance.”