Climate-friendly stocks are moving markets away from short-termism, EU watchdog says

24 February 2020 | Markets


Climate-friendly stocks have outperformed the broader market in the past two years and could also help to combat “short-termism” in financial markets, the European Union’s securities regulator said las week.

The European Securities and Markets Authority (ESMA) said integration of assets chosen for their environmental, social or governance (ESG) aspects is a growing part of portfolios.

ESMA said in its latest Trends, Risks and Vulnerabilities report that in stock markets, the ESG Leaders 50 index has for the past two years outperformed the corresponding benchmark index.

“This supports the view that investing in ESG does not compromise returns for sustainability, but instead enhances returns within a process of better incorporating ESG factors.”

Green bonds from the private sector are also growing, with €21 billion issued each quarter in 2019 with the amount now outstanding at €271 billion, still just 2% of the corporate bond market in the EU, ESMA said.

“As regards performance, there is no significant evidence yet that points to outperformance or underperformance of green bonds relative to conventional bonds.”

ESMA’s report also looked at “short-termism” pressure in markets, defined by the watchdog as the focus by market participants on a quick profit at the expense of long-term investments.

The rise in ESG investments could help counter this, it said.

“In particular, our findings suggest that the misalignment of investment horizons in financial markets and the remuneration of fund managers and executives that rewards short-term profit seeking could be potential sources of short-termism,” ESMA said.

“Improvements in the availability and quality of ESG disclosure could serve to promote more long-term investment decisions by investors.”

It said analysts at banks also contribute to short-termism.