Issuers with higher ESG ratings outperformed the broader bond market during what was a rocky first quarter, illustrating the asset class's ability to hold up even during times of stress, according to a recently published report by MSCI.
The company's MSCI USD IG ESG Leaders Corporate Bond Index outperformed its parent index the MSCI USD IG Corporate Bond Index by 0.75% and 1.29% in total and excess returns, respectively, the company said.
"From an ESG perspective, this was a real first stress test for our corporate bond ESG indices," said MSCI factor strategist Hitendra Varsani.
"It is not just fundamentally that quality outperformed, but also those that have a much stronger ESG characteristics also outperformed."
That stronger performance when the Covid-19 was sinking markets underscores that credits with strong environmental, social and governance credentials provide solid returns in good and bad times.
In the past, defensive-factor and ESG indexes have outperformed their parent indexes on an excess-returns over the one, three, and five-year period ending March 31 2020.
"Research has shown that companies that have stronger ESG characteristics are typically more profitable, have more resilient cash flows, they have lower level of systematic risk and lower idiosyncratic risk, compared to companies that have lower ESG ratings," said Varsani.