Why ESG investing could make you rich
The idea of investing in companies with a strong track record of environmental stewardship, social responsibility and strong corporate governance –“ESG investing— is booming in the world of stock picking. The SIF US Forum for Sustainable and Responsible Investing estimates that between 2016 and 2018, socially responsible investment funds in the US grew by 38 % to reach 12 trillion dollars.
Despite the coronavirus pandemic, research provider ETF Flows says ESG investing continues to grow in 2020, up another $15 billion in the first half of the year. Annualize that growth rate, and ESG is on track to grow 40% faster this year than last year (when $21.4 billion was poured into ESG funds, according to Morningstar data).
What’s the problem?
Outperformance and popularity
It turns out that ESG investing outperforms many other forms of stock market investing. Among US-based ESG-focused index funds surveyed in Q1 2020, 10 out of 12 outperformed the S&P 500 according to MarketWatch, and 11 of 11 non-US ESG-focused funds beat their respective international benchmarks.
Why do ESG funds outperform the competition? Popularity is one of the reasons. Studies show that younger investors (including Millennials and Gen Z) tend to favor investing in companies that are good global citizens. Investors who came of age in 2000 or later are “three times more likely” than investors in general to agree that companies should “serve communities and society” reports MarketingDive, and favor a business associated “with a cause social”.
When you consider that more than 83 million of America’s 328 million citizens are from the millennial cohort alone — more than one in four people — that’s a lot of investors putting their money where their values lie. . And it probably doesn’t hurt that many of the trends supported by ESG investors reflect some of the best performing segments of the stock market in recent times.
Environmentally friendly energy
Consider the most obvious example of ESG investing: renewable energy companies working on the transition from economy based on oil and gas to an economy that uses solar and wind energy to generate electricity, which can be stored in batteries and used to power cars and trucks.
electric car company You’re here (NASDAQ: TSLA) — which also manufactures solar panels to produce electricity, and solar batteries to store it — is the flagship of this movement, but it is far from being alone success.
Few stocks have performed as fabulously as Tesla in 2020, which has seen its share price roughly quadruple since the start of the year. But the remarkable success of the rival electric truck company Nicholas (NASDAQ: NKLA)which doubled in the following week its IPO in June, as well as “fuel cell” clean energy stocks such as Plug hole (NASDAQ:PLUG) and Bloom energy (NYSE:BE) over the past month, demonstrates the intense popularity of eco-friendly actions right now. The gains these stocks have accrued have also been a strong contributor to the outperformance of ESG funds relative to the broader stock market.
Treat workers well…
In today’s political climate, what makes a company “socially responsible” can generate heated debate. Without trying to rock the boat, it’s at least easy for everyone to agree that treating workers well is a social good.
To this end, it may be useful to examine the performance of some of the publicly traded companies that place great importance on Glass doors list of “best places to work in 2020”. Since the calendar flipped, the e-signature company DocuSignthe third-best place to work in the country according to Glassdoor, more than doubled the stock price, while the No. HubSpot is up a very respectable 41%.
Glassdoor notes that these companies receive praise from their employees — and achieve high rankings in its survey — “for promoting transparency with employees, providing opportunities for career growth, and delivering work driven by impact and purpose. “. Granted, earning “social” praise is no guarantee of stock market success. #10 on Glassdoor’s list, South West Airlines, has had an undeniably difficult year so far. At the very least, however, it seems that treating employees right hasn’t hurt the business of these companies at all and may help strengthen the hiring pool.
…and treating shareholders fairly
Finally, let’s take a look at governance, the “G” of ESG investing. Harvard Law School’s Corporate Governance Forum recently observed that “better governance can improve long-term returns for shareholders”. And that makes sense.
For example, when management is held accountable to shareholders by eliminating “classes” of directors from its board so that all directors can be elected (or eliminated) each year, this tends to focus attention of these directors on the quality of their company. running. When management is highly rated for explaining its business strategy, setting and achieving its goals, and keeping the language of its earnings releases clear and understandable, it makes it easier for shareholders to know whether the company is being run well – indicating how they should vote on these director elections. And it stands to reason that when companies are better kept on track, their returns will be more profitable for their shareholders.
When you add up the three elements – the E, the S and the G – a compelling picture begins to take shape. A recent study by “sustainable finance” firm Arabesque found that S&P 500 stocks ranking in the top quartile on these three attributes outperformed those ranking in the bottom quartile. by a whopping 25% over the five years from 2014 to 2018 – and again, this is all independent of the companies profitability, rapid growth or popularity.
It’s proof that you don’t have to sacrifice your principles to make money invest in stocks.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.