Eq: Tech
There has been extensive coverage as to the number of new loans issued being tied to ESG factors, namely greenhouse gas emissions and environmental sustainability, but there is a new dimension as to which companies are securing funding—gender equity. Many companies are signing loans that are tied to increasing women’s share of a company’s workforce from entry-level jobs all the way to executive and board positions. BloombergNEF estimates that these loans make up $19 billion of the market this year, already more than quadrupling 2020’s numbers. Companies improving diversity have better retention, collaboration, decision-making, and a broader talent pool according Tania Smith, leader of a bank authorizing these new loans. If companies fail to meet the diversity criteria they can face interest rate penalties much like the ESG market. Gender equity and diversity loans are a fraction of the total ESG market of $231 billion, yet they are a quick growing segment that will aim to improve gender equity in the corporate world.
FINSUM: This gives companies a new avenue to secure credit at a discount, much like ESG. If companies meet this criterion they can have an edge over competitors in terms of rates and access.
By Liz Su, CFA and Kevin Hart, CIMA of Boston Common Asset Management
Responsible investors have long believed that investing with embedded consideration of environmental, social, and governance (ESG) factors is a compelling approach to identify investment opportunities: well-run, thoughtfully managed companies built for the long term, ready to foster societal transition and dynamically adapt to our rapidly changing world. This belief is simple enough to justify: identification, application, and integration of ESG risks and opportunities can provide investors with additional, independently derived insight into a company’s management quality, strategic positioning, operational efficiency, and potential risk exposure.
The broader investment community has caught on. In 2020, ESG funds saw greater inflows than in any year prior, a nearly 140% increase over 2019 and nearly ten times greater than in 2018. Corporations have responded to this shift, with a record number of companies appointing their first Chief Sustainability Officer (CSO) in 2020, a year that saw more CSOs recruited than in the previous three years combined.
SUSTAINABLE FUND ANNUAL FLOWS AND ASSETS
Source: Morningstar. Data as of 12/31/2020
Includes Sustainable Funds as defined in Sustainable Funds U.S. Landscape Report, Feb. 2020.
Includes funds that have been liquidated, does not include funds of funds.
The transformative potential in the hands of ESG investors has grown by orders of magnitude. This exponential growth has brought an increasingly crowded field with a variety of approaches to ESG, creating ambiguity in the marketplace over what it means to be intentional as an impact investor. An authentic, intentional, and holistic approach relies on aligning active ownership strategies (e.g., shareholder resolutions, public policy participation, voting proxies) with stated investment goals, an ESG-led research process, and impact-oriented themes and targets.
Dispelling a Persistent Myth
There has been a widespread misconception among investors that ESG factors are non-financial. This is not entirely accurate. ESG factors can instead represent unpriced externalities and unmanaged risks that are uncorrelated with traditional financial metrics. By incorporating ESG factors into security analysis, investors can identify a host of material issues core to business fundamentals, enhancing the ability to recognize patterns that are not already priced in.
In addition to risk-mitigation, businesses that proactively accelerate the adoption of positive ESG practices and the development of solutions-oriented products have a unique opportunity to exceed revenue expectations and thus be rewarded with higher ratings over time. These companies may see an improving competitive position versus peers, while those that are on the wrong side of this transition may see changes in their cost of capital and an accompanying deterioration in their competitive position. Investing in the transition to a more just, sustainable world gives investors access to solutions-fixed revenue streams while altering the trajectory on climate action and racial equity among a host of other vital issues.
Identifying strong business fundamentals and ESG process leadership — underpinned by the belief that businesses with forward-thinking managements are higher quality — combined with insights gained from global, proactive, and sustained shareowner engagement can together form a positive feedback loop for better investment decision-making. Managers with the knowledge and experience to employ this holistic approach understand the need to incorporate the product dimension into impact and support companies whose products and services are solutions for societal, environmental, and human rights problems.
ACTIVE OWNERSHIP STRATEGIES
The Way Forward
We are at an inflection point where ESG is transitioning from niche to mainstream. True to the original spirit of the movement, we should hope not to build a new investment establishment in the image of the old, but instead to forge a dynamic, holistic, evolved approach, generating positive impacts by holding companies accountable as stewards of people and planet. As investors, holding ourselves to the same high standards we demand of portfolio companies will go a long way toward making these impacts sustainable.
We hope that you will join us on the journey.
Past performance is not a guarantee of future results. Investing involves risk including possible loss of principal.
This does not constitute investment advice or an investment recommendation.
This represents the views and opinions of Boston Common Asset Management. It does not constitute investment advice or an offer or solicitation to purchase or sell any security and is subject to change at any time due to changes in market or economic conditions. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes.
Applying ESG investment criteria to investments may result in the selection or exclusion of securities of certain issuers for reasons other than performance, and may underperform investments that do not utilize an ESG investment strategy. The application of an ESG strategy may affect an investment's exposure to certain companies, sectors, regions, countries or types of investments, which could negatively impact performance depending on whether such investments are in or out of favor. Applying ESG criteria to investment decisions is qualitative and subjective by nature, and there is no guarantee that the criteria utilized or any judgment exercised by an investment manager will reflect the beliefs or values of any particular investor.
AMG Funds LLC (“AMG Funds”) is a wholly-owned subsidiary and U.S. retail distribution arm of AMG. AMG Funds offers long-term investment strategies through a unique platform that includes a family of funds and separate accounts managed by a selection of AMG's investment managers.
N.B. This is sponsored content and not FINSUM editorial.
(New York)
If the trend is your friend, then ESG is a bandwagon all investors should be getting on. Coming of a pandemic year where ESG funds outperformed conventional offerings, ESG has been red hot in 2021, gathering up mountains of assets. There appear to be two major reasons for this. The first is that more and more investors care to be socially-conscious in their portfolios, and secondly, because a long-held thesis that ESG funds would outperform is coming true. Over recent periods, ESG has had less volatility and more upside than traditional funds.
FINSUM: One can play with the time frame and other variables to produce the results they want, but logically speaking ESG is making more sense as the risks in the market are increasingly aligned with ESG: politics, natural (and other) disasters, social changes etc.
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(San Francsico)
There are mixed signals as to how to currently position oneself in the market as news reports are calling many things a good buy, from doubling down on momentum to cyclical value stocks, but Goldman Sachs is bullish on lots of large-cap internet stocks. Amazon, Facebook, Snap, Uber, Lyft, and Expedia all received buy ratings from Goldman’s investment team. They see secular trends in revenue growth and operating efficiencies scaling these companies even larger over the next couple of years. While they don’t consider themselves overly bullish, they see digital advertising being a key lever to push for these companies to have their full upside priced correctly by the wider market. Subscriptions, the creator economy, cloud computing, and augmented reality are all reasons to be fans of large-cap growth, but they are staying away from Airbnb and Twitter. FINSUM: The fed-keeping rates low is very promising for growth companies that are reliant on the credit-frothy economy. But rate moves are also the key risk.
(New York)
ESG has been growing hand over fist, but it is still getting a lot of flak in the press. Two major reasons why. Firstly, many feel the sector’s performance is in question, largely because older investors believe there is an intrinsic misalignment between social & environmental goals, and returns. Secondly, many are starting to question whether ESG is really making an impact on society and the environment. Well, we cannot answer the second question, but number one has some new evidence. Morningstar recently ran an analysis of ESG funds, and found that: “25 out of 26 ESG equity index trackers beat funds that were conventionally weighted by market capitalisation, when it came to tracking the most common benchmarks last year”.
FINSUM: Proof of ESG outperformance depends highly on the timeframe being observed and the funds in question (which makes sense). For example, the last 18 months has been great for ESG because of some initial responses to the pandemic. Our view is that a lack of relationship to either out- or underperformance are both a good thing, since ESG is still accomplishing a social benefit and thus is a solid choice in the absence of any negatives to the investor.
(Silicon Valley)
Finding growth stocks seems difficult with many of the tech giants at their peak, but robotics and artificial intelligence is the route many investors are peering down in order to hit the next big growth company. The biggest ETFs in the space are ARK Autonomous Technology Robotics ETF (ARKQ), Global X Robotics & Artificial intelligence ETF (BOTZ), Robo Global Robotics and Automation Index ETF (ROBO), iShares Robotics and Artificial Intelligence Multisector ETF (IRBO), and First Trust Nasdaq Artificial Intelligence & Robotics ETF (ROBT). Cathie Wood’s ARKQ has outperformed this year in large part due to a bet on TESLA, but the ROBO ETF has outperformed the SPY over the last 5 years. Intuitive Surgical and Nvidia are the only stocks held by all five ETFs, and Chinese tech underpins most of these ETFs, which could be worrisome as regulation is erratic lately. However, Wall Street has the highest upside with most of the Chinese companies, with Alibaba Group and Baidu Inc. leading the way with over 60% appreciation anticipated. In the U.S. its TuSimple Holdings and PTC Inc. that have the largest consensus upside.
FINSUM: These robotics stocks are some of the best bets to be staples in the Nasdaq in the next decade, and should be part of your momentum portfolio.