If you’re a savvy investor, you’re probably already on board with ESG principles.
You know about the climate crisis. You’re staying ahead of COVID’s impact. You’re up-to-speed on social justice issues. And you’re aware that the world’s top corporations are adopting ESG (Environmental, Social and Governance) principles to help offset future catastrophes, while also solving larger societal problems.
And you’d probably agree that we’re entering a defining decade for the future of business – one that will help shape a more habitable planet, and also usher in a more fair and just society.
But you might not know exactly how it’s all going to happen – meaning, how do these translate into real-world business results? How will they affect share prices and impact larger markets? And what are some of the biggest opportunities, granted the time frame, and our government’s race toward 2030.
Keep reading, as we’ll discuss some factors. As always, feel free to consult with your financial advisor.
Value Vs. Growth – The ESG Battle of 2021:
If you’re a seasoned market veteran, you probably understand the concept of value stocks.
A quick reminder:
a.) A value stock is a security trading lower than what the company’s performance may otherwise indicate.
b.) Meanwhile, growth stocks are equities of companies with strong anticipated growth potential.
ESG funds tend to largely be comprised heavily of growth stocks. Why? The highest-fliers (and biggest returns) in the category tend to come from the ‘disruptors’ – the companies who make fast-growing technologies which rapidly solve problems. And what bigger problems could there be than, say, climate change?
While this approach tends to work well in a bull market, the prevailing economic winds from 2020 have shifted. In early 2021, in expectation of economic recovery, investors began jumping into more “conservative” securities, as well as companies that are deemed to be undervalued relative to their earnings potential.
In recent years, many ESG funds chased the market’s overall trends, which meant investing in tech. So, for the near-to-mid-term future (think 2021 to 2025), expect to see many ESG fund managers making inflows into value-oriented ETFs and other security classes.
As an individual investor, it might also make sense to investigate energy securities, such as legacy oil and gas manufacturers, who could potentially post strong profits, as they also shift toward supplying the world with greener energy.
Disrupt. Or Be Disrupted.
Previously, we talked about ‘disruptors’ – which are the companies that prioritize innovation and solve big-picture problems for companies and governments at scale.
But sometimes, catalysts for certain investing opportunities can lie outside of companies themselves, and be influenced by outside forces. In the 2020s, we could see a number of disruptive events – from ecotaxes to declining resources – which force companies to take left turns, and could send stock prices scrambling.
Meat Taxes: Producing beef and byproduct is big business. From the grazing land to the methane emissions to the abattoirs and supply chains, there’s a sizable environmental cost. Coming years may find ‘meat taxes’ falling into place, especially in Europe, which are taxes levied on animal products to help cover the health and environmental costs that result from using animals for food. What does this mean? Either short the butcher, or go long on legumes.
Nuclear Power: As of now, nuclear power is still the elephant in the room. But (despite the low-impact veggie mindset), it may be a beast we need to take a bite out of. Despite our best intentions, many experts doubt our actual ability to ramp up total green energy by 2030. And despite its potential health hazards and PR history, nuclear power is still readily available and able to provide large-scale quantities of carbon-free power. And with new tech developments, nuclear power could become an even more cost-effective, safe energy solution. Only time will tell how soon we need to fire up the reactors.
Plastic Taxes: As they might say in France, using plastic is just so gauche. For years, empty bottles in our oceans have been the scourge of environmentalists. And, in Europe, they’ve finally enacted a tax of €0.80 (about $1.00) per kilogram on nonrecycled plastic packaging waste. Could we see this happening in the U.S. in coming years? Call up your sources in the aluminum business, and see how they’re responding.
Big Data: How We Prove Big Results
Everyone means well. And we all speak well of ESG. But as companies, consumers and investors, when the rubber meets the plastic, do we actually do well? That’s why harnessing the power of big data will be so important in measuring, reporting and communicating long-term sustainability across ESG criteria.
From an investing perspective, investors would previously only consider financial metrics (such as outstanding shares or sales performance) when looking at which companies to invest in next. But now, they’re also considering ancillary metrics, for example, the composition of its board of directors, or issues that are related to health or services – such as ESG.
ESG data is important for many industries and roles as it shows an extra layer of detail. It is increasingly being incorporated into workflows in the financial industry and beyond. For investors to not only propagate the impact of ESG, but also to make smarter decisions, the visibility of data will be mission-critical.
So, for most, the proof will be in the pudding. Or the spreadsheets.
“Betting Against The Angels”
Of course, every upside has a downside, however small. As advisors, we would be remiss if we didn’t tell you about opportunities across the board.
As the ESG phenomenon becomes one of the most powerful forces in financial markets, attracting hundreds of billions of dollars to investment funds worldwide, there will be contrarians.
While the world turns green and everyone seems to have good intentions, these contrarians will not only place bets on securities and “vice stocks” – ones such as firearms, alcohol and tobacco – but also form hedges against ESG securities. Some experts are calling this “betting against the angels.”
If human history is any indicator, none of us is good 100 percent of the time. Which tends to bode well for “moated” industries such as alcohol, gambling and tobacco. And nobody (not even the most devout fund manager) says that even a highly ESG-focused portfolio can’t have a little fun … so to speak.
As always, the choice is up to you and your Signet advisor.
How Signet Can Help:
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The return may be lower than if the adviser made decisions based solely on investment considerations. All investing involves risk, including loss of principal. No strategy assures success, or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.)
Source 1.) “Biden impact on ESG investing will go deeper than climate” – Official Monetary and Financial Institutions forum
Source 2.) “ESG rush opens opportunities for betting against the angels” – Financial Times
Source 3.) “Don’t Write Off Vice Stocks in This Virtuous Market” – Bloomberg
Source 4.) “Flight To Value Stocks Hits ESG Funds” – Wall Street Journal
Source 5.) “Why is access to ESG data critical?” – Refinitiv
Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller. Stock investing includes risks, including fluctuating prices and loss of principal.
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