Stocks of ethical companies beat their benchmarks, study says

  • By Leslie P. Norton,
  • Barron's
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And now, a few more data points showing that ethical companies have a tendency to beat their benchmarks.

The latest evidence released Tuesday comes from JUST Capital, the nonprofit foundation backed by billionaire investor Paul Tudor Jones, which launched the JUST U.S. Large Cap Equity ETF (JUST) in June.

Every year, JUST Capital surveys people on what it identifies as the ideal criteria for companies, including worker pay and well-being, customer treatment and privacy, beneficial products, environmental impact, job creation, strong communities, and ethical leadership. It considers 80 items of information about each company, then ranks the Russell 1000 (.RUI) companies on how well they perform according to these criteria. In 2016, it created the JUST U.S. Large Cap Diversified Index comprised of the top 50% of performers. It holds 428 companies.

Now, the firm has examined how the companies in the index would have performed between January 2007 to September 2018. Over this period, it found that its index returned 10.4%, besting the Russell’s 8.7%.

“You will get market like performance, with much-better performance on ESG and JUST issues,” said Hernando Cortina, director of indexes and analytics for JUST Capital. He was referring to so-called ESG investing, which takes into account environmental, social, and governance factors.

The JUST U.S. Large Cap Diversified Index isn’t specifically an ESG index. Its criteria are “defined by the American people through polling surveys,” JUST Capital CEO Martin Whittaker said. If anything, the “S” or “social” issues “are more prevalent and prominent in the model than a black-box managed ESG,” Whittaker said.

The companies in the JUST index were more profitable, delivering 7% higher return on equity in the five years through September than the Russell 1000 companies not included in the index.

To delve further into the index’s outperformance, JUST Capital also controlled for the so-called Fama-French five-factor model that attributes equity returns to five factors: profitability, investment, value, size, and overall market factors. The firm found outperformance unrelated to those five market factors. “We can attribute some of the alpha to the just business behaviors that are exhibited by the JULCD Index constituents,” Cortina and his colleague Dottie Jones wrote in the study.

JUST hopes to launch fixed-income and other funds after the large-cap equity ETF, which began trading in June, gets to $1 billion in assets. Right now, the company’s ETF is at $275 million in assets.

In a separate study, Jones and Cortina noted that survey respondents put the most value on the way companies treat their workers. They identified three key ways in which companies could enhance worker treatment: by promoting work-life balance, providing career development opportunities, and committing to anti-discrimination in the workplace.

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