Wednesday, June 24, 2020

ESG Investing Shines in Market Turmoil, With Help From Big Tech: The strength of socially responsible funds suggests they have staying power; ‘ESG is not a fad’

By Caitlin McCabe of The WSJ. Excerpts: 
"Funds focused on socially responsible investing have been a rare bright spot in this year’s market meltdown, the latest evidence that the practice is more than a bull-market trend.

In the first four months of 2020, investors poured a record of at least $12.2 billion into funds that say they invest in environmental, social and governance practices, according to investment research platform Morningstar Direct. That is more than double the amount that ESG funds attracted during the same time last year, when the U.S. was in the midst of its longest-running bull market in history.

The steady inflows into ESG funds come as the group has logged better-than-average returns, despite this year’s wild ride in markets that has pulled the S&P 500 down 11%. More than 70% of ESG funds across all asset classes performed better than their counterparts during the first four months of the year, data provided by Morningstar Direct show.

The strength of sustainable investing suggests that ESG has staying power. Skeptics have long said investors might be willing to put their money into financial products that reduce their exposure to fossil fuels, for example, when stocks charged higher. But they predicted investors would abandon the practice for higher returns in times of turbulence."

"According to a study published last month by Mr. Serafeim and researchers from State Street Associates, companies that protected their labor forces and supply chains during this year’s stock-market drawdown saw more net inflows from institutional investors and better returns than their industry peers.

Kroger Co., KR 2.24% for example, said in March that it would pay a bonus to its front-line workers, provide paid time-off to employees placed under quarantine and make funds available to workers experiencing financial troubles during the pandemic. Shares of the supermarket company, which receives a high rating from MSCI ESG Research on issues such as labor management, rose 5.2% between Feb. 19 and March 23. In comparison, Walmart Inc. WMT -0.64% and Costco Wholesale Corp., COST -1.09% which have lower ESG ratings than Kroger, according to MSCI, fell 2.9% and 12%, respectively, during the period."

"A Wall Street Journal analysis of ESG equity funds found that nearly 150 of about 200 funds outpaced the average return of a fund’s broader category.

For example, the Integrity Growth & Income Fund Class A—which holds Thermo Fisher Scientific Inc. TMO -2.48% and Intel Corp. INTC -1.39% as part of its mission to invest in companies with “ethical business practices” and “evolutionary innovation”—declined 8.8% in the first four months of the year. In contrast, the category of large-cap value and growth stock funds in which the Integrity fund is included fell 11%, according to Morningstar Direct.

Yet the equity funds that earned the highest returns overall, the data showed, were largely ones that heavily invested in big technology companies."
"One of the biggest criticisms of ESG investing is that funds often look no different than big technology portfolios."

"Still, ESG advocates say, big tech companies aren’t necessarily the kinds of sustainable investments that people envision when they think of ESG. Jeff Buffum, of Buffum Wealth Management, which is affiliated with Northwestern Mutual Wealth Management Co., said he started building an ESG portfolio after clients expressed interest in renewable-energy investments and disdain for gun-manufacturing companies.

However, Jon Hale, Morningstar’s director of sustainability investing research, said that being generally overweight in the technology sector didn’t provide ESG funds much of a boost. Instead, he found, the bigger drivers of ESG success were having less energy-sector exposure and a selection of stocks—including in the technology sector—that scored better on ESG credentials than their peers."

Related posts:

Funds that market themselves as sustainable investments aren’t necessarily focused on companies that fight climate change, develop wind turbines or promote diverse boards

ESG Funds Draw SEC Scrutiny (companies that pursue strategies to address environmental, social or governance challenges)

Is it a retailer’s job to keep shoppers from their vices? (or Adam Smith vs. CVS pharmacy)

Can You Find Virtue by Investing in Vice?

What if companies pledge to adhere to social and environmental accountability guidelines?

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) 

Data show that socially responsible investments can outperform the S&P 500 index

Is altruism a result of selfishness?

Do you have to be selfish to make more money?

Does collective self-deception mask selfish behavior?

Why Doing Good Makes It Easier to Be Bad

Businesses intentionally display their social and environmental performance in addition to their financial performance to stakeholders

Should you invest according to religious guidelines?

For a humorous view of this issue see

A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find? by Joseph C. Sternberg of the WSJ

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