One of the best things about summertime in the Great Lakes is how verdant the landscape is. Being surrounded by big, beautiful sugar maple trees in deep green with a warm breeze—it doesn’t get much better than that.
Green is also a trend we see in financial markets. Everyone wants to be greener than the next company.
By now, the term “ESG” has almost become a household abbreviation. Or at least a common phrase at the office (even pre-COVID). Environmental, Social, and Governance are key themes that are discussed in C-Suites across the globe.
People actually track this stuff. Just last week, FactSet reported that a record number of executives uttered “ESG” on conference calls during the most recent earnings season. FactSet is an international company that monitors corporate earnings trends. 154 S&P 500 companies talked about ESG issues last quarter—a new record.
Executives Can’t Stop Talking About ESG (FactSet)
So why is this important? There are a few things to consider.
- Thematic investing: Green stocks were huge winners in 2020 as renewable energy firms performed very well, particularly in the months leading up to President Biden’s inauguration. Investors bet on the new Democratic government favoring environmentally-friendly companies. Don’t get too excited though, clean energy equities have taken it on the chin since January! It goes to show that while an investing theme might make sense intuitively, the market might have other ideas. This is why while we have small positions in individual stocks, we mainly stick to a low-cost asset allocation strategy.
Clean Energy Fund (ICLN): Down 35% Since January
- New Kids on the Block: No, I’m not talking about the 1980s boy band here. The new kids are Millennials and Gen Z. These young investors were born from 1981 to 2012 with 1996 demarking the two generations. According to a recent survey (pictured below), they demand investments that are “doing good” concerning ESG. Green companies (the “E”), firms that respect diversity and inclusion (the “S”), and those with admiral corporate governance traits (the “G”) are favored by the two generations. The graphic below illustrates that the new wave of investors will likely be putting cash to work in stocks that have high ESG scores.
Millennials and Gen Z Consider ESG Factors When Investing (Bank of America Global Research)
- Less Risky? Remember that BP oil spill 11 years ago? Or how about the more recent PG&E wildfires in California? Bad memories. Ugly “ESG events” like these hurt a company’s ESG score. Bank of America found that the lower a firm’s ESG score, the riskier and more volatile its earnings outlook tends to be. CEOs hate uncertainty.
Corporate Profits Are Least Volatile For the Best ESG Companies (Bank of America Global Research)
2021: Poor ESG Companies Making a Comeback?
Ironically, some of the best stocks in 2021 have been those with the worst ESG scores! Traditional oil & gas names like ExxonMobil and Chevron have been strong. Case in point, shares of Ford & GM are crushing Tesla this year.
The Wall Street Journal said that shares of companies considered by the scoring company Refinitiv to be poor performers on ESG metrics have jumped 26% since the beginning of this year.[i]
The Point
The latest corporate earnings season featured a record volume of executives mentioning “ESG”. Expect more media buzz of how important being a responsible firm is nowadays. As an investor, don’t get too enamored with the promises of CEOs though. Resist the urge to rush out to buy the latest hot stock that purports to have a new electric vehicle that will revolutionize the world. Sticking to a long-term investment strategy is the important thing. Don’t be green with envy.
We’ll talk soon!
[i] https://www.wsj.com/articles/how-esg-stocks-perform-depends-on-who-ranks-them-11623403803