ESG or Environmental, Social and Governance Investing is now part of the investment landscape.
Let’s start with a story. November 27th was the annual Harvard/Yale football game. It’s been an Ivy League event forever. This year at half time about 150 students took to the field in protest. They were joined by hundreds more. They were chanting “Disclose, Divest, Diversify” in direct opposition to the investment practices of the endowment funds of the two universities. The endowments are legendary and they are huge. Neither however has any formulated ESG investing position. The students want it. They are young and very motivated by climate change and what is being done about it.
So what is ESG Investing Anyway?
This is best explained by using 3 examples.
Those pensions and endowments that still invest heavily in energy, aka oil and gas are being punished. Encana would be the best (worst) example of this. Year to date, at time of writing, the TSX is up 18.7%. Encana is down -34.0%. Ouch. In part, the push toward ESG investing has been responsible for the under-performance of energy stocks in Canada and elsewhere. It’s questionable what impact this will have on the environment in the long term but right now, it’s a thing that could impact an investment portfolio.
Pfizer currently is under a hailstorm of litigation arising from their alleged “false, misleading or incomplete statements regarding the cardiovascular risks of Celebrex and Bextra.”
This class action lawsuit was brought by investors alleging, among other things, that Defendants violated the federal securities laws by making false, misleading or incomplete statements regarding the cardiovascular risks of Celebrex and Bextra. Defendants vigorously denied and disputed Plaintiffs’ claims.
Again, the markets have not been kind to the company. Year to Date, the S&P 500 is up 24.5%. Remarkable. Pfizer is down -12.14%. Again, ouch.
The logic here goes such that responsible governance creates better decision making across the board and therefore better results in terms of earnings and share price. The example here would be WeWork.
In April of this year WeWork filed for an initial public offering (IPO) and that’s where the trouble started. The financial statements were out in the open. It was found that the co-founder and former CEO Adam Neuman had been buying properties and leasing them back to WeWork, borrowing against his own stake in the company. He also trademarked the word “We” and charged WeWork nearly $6 million for using the word after the company rebranded itself as The We Company.
Pretty sure that’s dirty pool on the governance side. The markets reacted accordingly, and the initial public offering was taken off the table. Investors weren’t buying.
So Does This Make a Difference?
It certainly does. The best place to go to get an understanding of the change is the Canadian site www.riacanada.ca
To summarize a few of the more salient points.
Who Does This?
And So for Now?
Mutual Funds and ETFs have now taken this on as a marketing tool. Most funds publish their ESG scores alongside their returns, risk factors and other material data. The scores are generated by Morningstar, www.etfdb.com, and others.
This is now a thing. The cautionary note is that this is not new and there is no real cross reference for a material time period. The jury is out.
How Do We Feel About It?
We have larger questions about the longer-term sustainability. Time will tell if ESG investing will reward investors over time. So far the results are promising but given a lack of long term history it is not immediately provable.
We feel our role is to provide all information and options and through discussion come up with the best solutions for you. If you are interested in ESG for your portfolio, let us know so we can discuss further.