At the moment, when so many industries are staggered by the coronavirus pandemic, investors are beating the market by putting their money in companies committed to environmental, social and governance (ESG) priorities favouring transparency, diversity and sustainability.
ESG is where profits are, signalling that doing the right thing increasingly is the smartest bet. The iShares exchange-traded fund investing in companies it thinks have “positive environmental, social and governance characteristics”, one of the largest of the type, produced a total return this year that is more than three times the performance of the S&P 500 index.
The convergence of high-mindedness and profit was noted last month by Al Gore, the former US vice president, 2000 Democratic presidential candidate and Oscar-winning environmental documentarian. He told a Bloomberg conference: “It is ever clearer that sustainable technologies are cheaper and better.”
For more and more companies, doing the right thing is becoming as much a business imperative as a social responsibility, especially in the market for renewable energy. Apple, which has appreciated 30 per cent this year, recently unveiled its plan to become carbon neutral across its entire manufacturing supply chain and product life cycle by 2030. Nike is part of the RE100 coalition of companies planning to supply all energy needs from renewable sources by 2025.
“Long term, renewables could emerge stronger than ever, especially if governments integrate support for clean energy into Covid-19 economic recovery programmes,” said a report in May by the Yale School of Environment.
That’s already reflected in the anticipated performance of 38 US-based companies generating at least 50 per cent of their revenue from clean-energy products or clean technology. As a group, their sales are expected to rise 9 per cent this year, 30 per cent in 2021 and 23 per cent in 2022, according to data compiled by Bloomberg.
By contrast, the 26 corporations in the S&P 500 Energy Index, a benchmark for fossil fuel, will suffer revenue declines of 29 per cent in 2020, followed by growth of 11 per cent in 2021 and 13 per cent in 2022, according to analyst estimates compiled by Bloomberg.
The phenomenon of ESG stocks outperforming the market is a long-term trend accentuated by the coronavirus. The 38 clean companies produced a 254 per cent total return (income plus appreciation) in the past 12 months, 250 per cent during the past two years and 330 per cent since 2015. Among them, Tesla’s one-year return is 575 per cent, including 130 per cent since March when the coronavirus prompted much of the US economy to shut down.
Enphase Energy, the renewable energy equipment maker based in Petaluma, California, gained 199 per cent over the past year, including 27 per cent since March. Vivint Solar is up 192 per cent over the past 12 months and 107 per cent since March, according to Bloomberg.
Traditional energy companies in the S&P 500 Energy Index lost 35 per cent, 46 per cent and 33 per cent, respectively, for the one, two, and five-year periods. Exxon Mobil declined 38 per cent during the past year, including 13 per cent since March. Conoco Phillips is down 30 per cent over 12 months, including 16 per cent since March. Kinder Morgan, the Houston pipeline transportation and energy storage provider, tumbled 28 per cent during the past year, including 25 per cent since March, according to data compiled by Bloomberg.
Since March, when the pandemic proved its virulence, ESG’s advantage over the market doubled. That’s reflected in the distance between the performance of BlackRock’s iShares Global Clean Energy ETF, one of the largest exchange-traded funds investing in renewable energy and clean technology, and State Street’s Energy Select Sector SPDR Fund, one of the largest ETFs investing in traditional energy companies. The fossil fuel crowd is getting crushed, according to data compiled by Bloomberg.
Anyone who thinks that ESG investors are more lucky than smart, or a trendy cohort of woke millennials, should consider the divergence between Aramco and Tesla. Aramco, the Saudi oil giant that was edged out by Apple on Friday as the world’s largest company, was valued at more than $2 trillion (Dh7.3tn) after its initial public offering in December. Since then, Tesla’s market capitalisation quadrupled to $286 billion passing Toyota Motor to become the world’s biggest automaker. During the same period, Aramco declined 15 per cent to $1.7tn, according to data compiled by Bloomberg.
The gap between Aramco and Tesla narrowed $500bn, a little more than the $467bn value of the world’s 9th-largest company. That would be Berkshire Hathaway, created by Warren Buffett, once the world’s richest man and the avatar of value investing. He’s shown no inclination to move toward ESG. So far.
Matthew Winkler is the editor-in-chief emeritus of Bloomberg News, writes about markets.