The coronavirus outbreak has had a mixed environmental effect. The sheer mountain of waste from all the plastic disposables makes an already serious problem worse. On the other hand, reduced transportation and factory output has made the air cleaner. Less obvious, socially responsible investing is outperforming the market.
The concept of socially responsible investing first emerged in the 1960s and 70s. Investors who cared simply avoided companies that operated in certain sectors. Some shunned industries such as tobacco, liquor, firearms, or gambling. Some stayed away from companies that did business in South Africa during the apartheid era.
ESG investing, a subset of socially responsible investing
Nowadays, socially responsible investing has changed its focus. Proponents seek out companies that express a commitment to certain goals. That is, they still apply various filters to exclude companies that violate their social principles. But they also actively look for companies whose policies exemplify their principles.
This subset of socially responsible investing, ESG investing, focuses on three main criteria. The initials stand for environmental, social, and governance.
The environmental aspect includes a commitment to resource conservation, zero waste policies, climate change reduction strategies, environmental employee benefits, etc. ESG investors look past sustainability claims and goals on corporate websites to find measurable progress in lowering the company’s carbon footprint.
The social aspect includes diversity and inclusion in hiring and awarding contracts, ethical supply chains, and a company’s behavior on social justice and consumer protection issues
The governance aspect includes the structure of the board of directors, diversity of the management team, and executive compensation. An interlocking directorate or generous golden parachutes, for example, would count against a company being considered for socially responsible investing.
Traditionally, shareholders have demanded corporate policies that will give them the greatest return on investment. No other considerations matter.
Socially responsible investing, therefore, has seemed like a fringe movement. Advocates keep insisting that it is “the next big thing,” but it requires both investors and corporate directors to balance maximizing return with other factors for the social good. At some point, those other factors must take precedence at the expense of a less than maximum bottom line.
Some effects of the pandemic on business
The COVID-19 pandemic has forced many businesses to reimagine their operations. They need to accommodate employees working from home, including conducting remote meetings. They must provide a safe environment for both workers and customers at physical job sites.
Many people have noticed that, with the global economy largely shut down, the air is cleaner. The sheer number of people working from home instead of commuting to an office helps account for it.
For this and other reasons, more companies have started to look seriously at how their environmental policies affect their bottom line. It seems entirely possible that more and more of them will start to embrace sustainability not just to get a good reputation, but because it’s good for their business.
ESG investing and the pandemic
Before the pandemic, socially responsible investing looked like a luxury. In that case, investors should have fled to more stable and basic strategies. Instead, it has thrived.
In fact, now it appears that companies with the best ESG practices will perform better on the stock market than those without. Certainly, the top-ranked ESG companies in the S&P 500 have outperformed the index as a whole. In particular, they were less volatile during March and April 2020 when the market was at its most turbulent.
ESG stocks are outperforming the market despite the coronavirus outbreak. Compare 38 U.S.-based companies that obtain at least half of their revenue from some kind of clean technology with the 26 corporations in the S&P 500 Energy Index, which represent the fossil fuel industry.
Sales of the cleaner companies are expected to increase 9% this year, despite the devastating impact of the pandemic on the economy. The fossil fuels companies are expected to suffer a 29% decline in revenues.
The 38 clean technology companies have produced a 254% return on the stock market in the 12 months ending in July 2020. Tesla returned 575% in that same time and 130% since March 2020, the beginning of the virus-prompted shutdown of the economy. The 26 fossil fuel companies lost 35% over the same period. Exxon Mobil lost 38%, including a loss of 13% since March 2020.
The Saudi oil giant Aramco had a value of more than $2 trillion after its initial public offering in December 2019. It lost 15% of its market capitalization by the end of July 2020. At the same time, Tesla’s market capitalization quadrupled. With $286 billion, it passed Toyota to become the largest automaker in the world.
Some tentative conclusions
These few comparisons illustrate the general fact that ESG stocks had an advantage over other exchange-traded funds before the COVID-19 pandemic started, and that the advantage has doubled since then.
I am not qualified either to give investment advice or to predict market moves. On the other hand, it doesn’t take a financial specialist to figure that the pandemic has imposed permanent changes on society.
Some day—and the sooner the better—we will get back to normal, but normal will look different from before. If good ESG practices remain a competitive advantage on the stock market, I suppose socially responsible investment will become a more mainstream strategy. And if corporations cease to view maximum returns as their sole responsibility to stockholders, who knows? Maybe increased social conscience will even overcome progressive hatred of corporations.
ESG investing stands out during COVID-19 volatility / Nathan Miller, Invesco Blog. July 22, 2020
Socially conscious investing thrives amid pandemic / Matthew A. Winkler, Bloomberg. July 28, 2020
What is ESG investing? / Alyce Lomax and John Rotonti, Motley Fool. February 25, 2020
Will the coronavirus change ESG investing? / Salvatore J. Bruno, ETF Trends. July 26, 2020