Eq: Total Market
ESG is a very notable area right now that has been gathering considerable assets. Client demand for such products is high in certain demographics. That said, some reports show that ESG stocks do not perform as well as their conventional peers. With that in mind, here are some of the best ESG stocks that looked primed to do well (and most of them won’t even be recognizable as ESG). The stocks are: Home Depot (HD), PayPal (PYPL), GlaxoSmithKiline (GSK), Equinor (EQNR), Churchill Capital Corp IV (CCIV), Microsoft (MSFT), Unilever (UL).
FINSUM: We love Home Depot here. The fundamentals look good –Millennials, which are the largest generation ever in the US, are entering prime home-buying years—and Home Depot is a leader in social responsibility, with diverse hiring practices.
BAML’s chief investment office has put out some comments on how to help position ESG for clients. The ESG sector is plagued by misinformation and vagueness which clouds the overall value proposition. Accordingly, the best way to approach it is to have a matter-of-fact conversation to demystify things. According to BAML, “Advisors find clients are generally looking to avoid certain areas depending on their preferences, or because they have found investments score poorly by ESG metrics; favor investments they think will benefit various social or environmental practices; or help contribute to measurable outcomes around such an initiative”. They continued “It's an opportunity to demystify the conversation and also to keep it in a dialogue, because where we find this goes awry is when anyone feels like there's a moral superiority or mandate going on as opposed to a dialogue around your personal preferences”.
FINSUM: It is easy to get lost in the world of things claiming to be ESG. The best way to approach the sector is to be specific (e.g. I want a portfolio without fossil fuels), or at least specifically vague (I only want to invest in companies with high ESG scores).
The market has been blindsided this week, with big losses. However, the 13th was great news for investors, as the market finally showed some resilience, rising considerably despite some more worrying inflation data (PPI). The 1%+ gains on the 13th are a distinct sign: investors are still willing to buy the dip.
FINSUM: Investors still seem to believe in the fundamental direction of earnings and the economy. Our opinion is that this bout of inflation is temporary, but even if it isn’t, it is a good sign that investors can see beyond the inflation numbers right now.
The stock market has been on one of the most historic recoveries in market history, but…see the full story on our partner Magnifi’s site
In an eye-opening “expose” type article, for CIO of Blackrock’s ESG division went on the record saying that ESG was largely just hype and had little substance behind it. According to former CIO Tariq Fancy, “In truth, sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community”. The comments ran in USA Today on March 16th.
FINSUM: The reality is a little more complicated. ESG does suffer from a great deal of greenwashing, and firms—at first—did little to genuinely integrate ESG into their decision-making. Over time, they have taken greater account of real ESG factors in investment selection, but at the same time much of what constitutes “ESG” and “green investment” is muddled and unclear. There is a reporting issue that the whole industry suffers from—there is not enough data to separate good from bad companies—and thus much of the investment selection gets generalized according to industries (e.g. tech is good, energy is bad), which is so broad as to be almost useless.
For many years ESG had been a fairly neglected asset class. Advisors and many retail investors thought that investing capital with moral considerations would hurt returns. Over the years many things have changed, including investors learning that ESG screens have actually led to outperformance in many cases and younger generations showing that they care a great deal more about these issues than their parents. Well, those stimuli have led to huge growth in the ESG space, and are leading to big revenue gains for asset managers. Fund providers are able to charge significantly higher fees for ESG-focused ETFs because of their moral importance to clients, and this has led to good fee revenue in an industry that is otherwise seeing contraction.
FINSUM: The key thing to remember here is that ESG funds don’t cost any more to run, so this is highly profitable for asset managers.