As corporate environmental, social and governance issues have come onto investors’ radar in recent year, so-call ESG stocks become a portfolio focus. General concerns about the risks big business poses to the environment and society at large have fueled this movement.
Investors are as concerned as ever that companies’ governance must engage in, and properly report sustainable and socially responsible business practices.
Predictably, a wave of score cards and firms that monitor ESG efforts and results have emerged. And overall, there is a push-pull dynamic which has ensued. ESG proponents are demanding business be more ethically, socially, and environmentally responsible. Businesses are pushing back because many of the demands can sour the bottom line.
In any case, as demand for ESG stocks, funds and ETFs has increased, regulators have been keenly observing the evolution of the sector. The Securities and Exchange Commission (SEC) has issued a series of responses including risk alerts, bulletins and established a task force for ESG oversight.
The overall thrust is that the SEC hopes to require the adoption of standards by which corporate issuers disclose material ESG risks. The reaction to this depends upon one’s subjective interpretation: it could be excessive or entirely necessary.
In either case, if the regulator mandates increased oversight of ESG stocks, the result will be predictable. Some of the shine will wear off in aggregate. Here are some of the stocks which could lose the most.
- SPDR S&P 500 ESG ETF (NYSEARCA:EFIV)
- Beyond Meat (NASDAQ:BYND)
- Tesla (NASDAQ:TSLA)
- Alpha Architect Freedom 100 Emerging Markets ETF (BATS:FRDM)
- Inspire Global Hope ETF (NYSEARCA:BLES)
- Microsoft (NASDAQ:MSFT)
- Salesforce (NYSE:CRM)
ESG Stocks: SPDR S&P 500 ESG ETF (EFIV)
As this list is a blend of stocks and exchange-traded funds, the first entrant on this list is an ETF. This particular one seeks to avoid polluters, tobacco, and guns. The top holdings in the SPDR S&P 500 ESG ETF are essentially the who’s who of the tech world.
EFIV stock investors should hardly be surprised that these companies have made significant ESG efforts given their sector and geography. Frankly, these are exactly the companies one might expect to espouse them.
So while these companies receive a lot of good press in leading the march toward ESG principles, they are also the face of ESG, in a sense. Therefore, if the SEC has its way and stricter regulations for ESG reporting come to be, these companies will be hit harder. As a result, the EFIV ETF will take a hit.
Beyond Meat (BYND)
First of all, it must be noted that BYND stock is no stranger to fluctuations. So, in the event of increased ESG scrutiny, Beyond Meat will be accustomed to the turmoil.
One need only look at its price chart for its first two years of public trading to see that. In its first three months of trading, it more than tripled in price and has moved up and down ever since.
Clearly Beyond Meat is most identifiable for its environmental impact in that ESG trifecta. It produces plant-based protein, thereby reducing methane emissions. Livestock are responsible for 14.5% of global greenhouse gases. Reduce demand for livestock, and reduce emissions.
Beyond Meat touts a study comparing its plant-based burger to a U.S. beef burger. That study found that Beyond Meat used 99% less water, 93% less land, 46% less energy and emitted 90% less greenhouse gases.
Statistics like those certainly serve to attract investment. Further, Beyond Meat is also showing improving fundamentals. For example, it recently released first-quarter results which showed that revenues increased 11.4%. But under SEC scrutiny I’d be willing to bet that investors look more toward its EBITDA loss of $10.8 million in the same period.
Tesla is in many ways the poster boy for environmental investing as it relates to the automotive industry. However, critics have long argued that electric vehicles have broad environmental risks. Tesla has been front and center in that argument.
And recently, at the end of 2020, TSLA stock was added to the S&P 500 index. When the S&P 500 added Tesla to its index there was concern that it might not make the cut for the S&P 500 ESG index. That certainly would have boosted the argument in favor of electric vehicle sustainability critics.
When Tesla was assessed in 2020, it was on the cusp and absolutely in danger of missing the cut. At that time its ESG ranking was in the 22nd percentile of all automakers globally. It ranked 436th out of the S&P 500.
So there is real concern that it might miss the cut in the April 2021 rebalancing of the S&P 500 ESG Index. Those results have not yet been released. Whether Tesla does or does not make the cut may be immaterial in any case. There is increasing awareness that Tesla vehicles and the company aren’t as ESG friendly as perhaps imagined. SEC scrutiny will only magnify that inconvenient truth.
Alpha Architect Freedom 100 Emerging Markets ETF (FRDM)
The Freedom 100 Emerging Markets ETF leans heavily on the ‘S’ in ESG investing. The FRDM stock portfolio covers roughly 100 equities — give or take a few when it rebalances — from countries with higher human and economic freedom scores.
The top two holdings currently are Taiwan Semiconductor Manufacturing (NYSE:TSM) and Samsung Electronics (KRX:005930). It is clear that the ETF values semiconductors and democracy. Those are two things which Taiwan and South Korea both have plenty of.
This is not to say though, that this index is primarily semiconductor focused. It does have other semiconductor stocks but it also contains bank stocks and even mineral stocks.
Some readers must have clued in on something when they read that last sentence. That is, if this ETF is so ESG friendly, then why does it contain mineral stocks. Mining companies are notorious polluters. Therefore, the ‘E’ in ESG is essentially a lie.
That brings me to a bigger issue: How can some of these companies and ETFs pick and choose which aspects of ESG they get to market themselves as? I think that’s part of the SEC’s broader argument as well.
Further, if this ETF is indeed so committed to human and economic freedom, some of its holdings do bear examination. One of its holdings is a Chilean mining company. I would guess that its employees probably don’t have a great deal of human or economic freedom. Just guessing.
Inspire Global Hope ETF (BLES)
The Inspire Global Hope ETF is a bit of a unique twist on traditional ESG based investing. The ETF invests in “inspiring, biblically aligned large companies ($5B+ market cap) from both the U.S. and around the world.”
BLES stock judges how well its holdings meet the criteria by using the Inspire Insight Impact Score. This score ranges from -100 to 100. A company with a positive score would be one which is more biblically aligned based on its criteria.
This particular style of investing certainly has appeal given how easy it is to find investment options which align with almost any characteristic one might align with. The fund seeks to avoid companies in countries which discriminate against Christians, sponsor state terrorism and other biblically averse factors.
The last two companies on this list might not be the first you think of when the topic of ESG investing comes up. However, both Microsoft and Salesforce are among the top 20 ESG companies according to MSCI ESG Research.
Therefore, it stands to reason that increased scrutiny will befall them, and MSFT stock, if the SEC increases its regulation of ESG claims and marketing.
Microsoft’s website goes into great detail in regard to the company’s ESG efforts. I personally believe Microsoft is simply a great company. That doesn’t mean that it can’t come under fire though.
The company issued a 37-page corporate social responsibility report for 2020. It isn’t difficult to find facts and figures within the report which could be controversial, or at least open to interpretation. Greater SEC oversight simply means that a finer comb sifts through these numbers.
Salesforce, like Microsoft, has a large portion of its website dedicated to sustainability and ESG, as detailed in its report on the topic.
My guess is that like Microsoft, Salesforce’s dedication to ESG goals is a double-edged sword. Salesforce has a robust program in place for tracking, implementing, and integrating all of its ESG efforts.
This is great when ESG is viewed in a positive light. CRM stock investors can view the materials and feel good about investing in a strong company with transparent values and business.
Yet, when ESG values are under the microscope, the opposite is true. This is true of all of the highly rated companies on the list linked above. I’m not implying that Salesforce has fudged any of their ESG numbers. Rather, I’m simply noting that it’s much easier to verify their claims and poke holes in its ESG arguments.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.