When millennials became the largest generation in the U.S. workforce, their relevance wasn’t just limited to sheer numbers. Rather, this age bracket hails from a diverse melting pot and with it comes a dynamism of ideas and philosophies that have made companies of all sizes take notice. Among the biggest financial impact has been the rise of ESG investing, or investing based on environmental, social and governance concerns.
To better understand the core principles underlining ESG stocks, I highly recommend that you read InvestorPlace web content producer Sarah Smith’s excellent presentation of ESG investing. In a nutshell, many people are now grading their portfolio acquisitions based on their target companies’ environmental impact, furthering initiatives for social equity and implementing fairness, transparency and diversity in corporate governance.
For those that are unfamiliar with ESG investing, they might dismiss the concept as a youth-centric trend that will eventually fade away. After all, everybody goes through their tree-hugging phase, they may reason. But it’s important to realize that after decades of declining trust in public governance, the younger generations are unwilling to make the mistakes of those who came before them.
Nowadays, millennials and the emerging Generation Z are holding big organizations accountable for their actions. Further, as Smith points out in her take on ESG stocks, the present political landscape has brought many historical inequities to the forefront. Honestly, corporate executives ignore the power and influence of ESG investing at their own risk.
Further, the evidence of non-sustainable practices is all around us. For instance, California Governor Gavin Newsom blamed the wildfires that we suffered in the west coast on climate change. To be fair, I’m not sure that Newsom’s claim that this tragedy is “proof” of climate change is 100% accurate. However, the perception is enough for people to call for change, which may impact ESG stocks.
If that wasn’t convincing enough, we all know that big business is all about big profits. According to McKinsey & Company, it pays to support ESG investing. In fact, the research and consultancy firm noted that “…ESG-oriented investing has experienced a meteoric rise. Global sustainable investment now tops $30 trillion—up 68 percent since 2014 and tenfold since 2004.”
Finally, we live in a Yelp (NYSE:YELP) society. In other words, if you do some ESG investing good, you will be praised for it. But if you fall short, you will likely face extreme criticism. When social media outlets play the role of judge, jury and executioner, you don’t want to be on the wrong side of a burgeoning movement.
Therefore, if ESG investing is good for companies that practice proper governance, it’s logical that ESG stocks may also play a powerful role for shareholder profitability. Here are seven steps to help you make your portfolio cleaner and more sustainable.
Set Aside Your Personal Emotions
Though not exclusive to ESG investing, managing one’s emotions is one of the best pieces of advice for any monetarily-related venture. But when you’re dealing with ESG stocks specifically, you’ll want to avoid any kind of emotional accelerant — for or against a target investment. Rather, objectivity is the name of the game.
First, it’s easy to get sucked into the “feel-good” narrative of ESG investing. Don’t get me wrong – there’s nothing bad about a company’s efforts at proper governance, particularly relating to gender and racial equality, being a source of attraction. However, you also want to make sure that you’re getting involved primarily because the target asset meets your monetary goals.
Second, you don’t want to go the opposite end and avoid a perfectly good organization simply because it espouses values that you believe are trivial. Look, I’m not naïve. When Kroger (NYSE:KR) chairman and CEO Rodney McMullen released an email entitled, “Standing with Our Black Associates, Customers and Communities,” it appeared tone-deaf.
Why? Well, other non-Black disenfranchised communities exist. What about women of all backgrounds? Or poor white communities? As a person of color myself, I didn’t feel included in this supposedly inclusive message.
In my opinion, this is a serious source of contention toward an ESG investing narrative. Nevertheless, you got to put that aside and assess KR holistically. Granted, it’s not easy to do at times. But if you want success with ESG stocks, you must kick out your emotions.
Know Your Audience
I’ve long heard that fear of public speaking is this country’s greatest fear. According to a 2014 Washington Post article, this phobia still ranked as number one. This was of course before the Post became a fake news organization, so I believe the information is reliable.
One of the ways to overcome this fear is through preparation. I’ll share a personal example. When CGTN America reached out to me to discuss the issue of firearm sales during this pandemic, I was both excited at the opportunity and nervous as all heck. From the New York Times, the channel reaches 30 million U.S. households. As the producer gave me the countdown, I could feel my heartbeat pounding in my eardrums.
Overall, I was satisfied with my performance – here’s a life tip, complacency is the road to mediocrity. I was able to perform under pressure due to preparation. And a significant component of preparation is knowing your audience.
Further, this knowledge is crucial for success with ESG investing. For example, a Pew Research Center study indicated that millennials and Generation Z think similarly along political and social issues. Frankly, I don’t think investors realize what a goldmine this is.
So much of corporate marketing today is geared toward millennials. But guess what? Pew is stating that if something appeals to millennials, chances are, it will attract Gen Z as well. Basically, viable ESG stocks have a 30-year upside pathway (assuming generation length of 15 years) at minimum.
Seek ‘Organically’ Relevant ESG Investing Plays
Not counting a brief layover at JFK, the entire U.S. east of Arizona might as well be a foreign country to me. Therefore, I’ve never been to the regions known as “Trump” country (at time of writing, Arizona is leaning blue). But if I did, I imagine I would hear the following pejoratives regarding ESG investing: snowflakes, soy boys, beta.
However, ESG stocks aren’t just about tree-hugging, although there could be an element of that. As our own Sarah Smith pointed out, “The bottom line is that this acronym incorporates a whole lot — and you do not have to check every box with one investment.”
For instance, FLIR Systems (NASDAQ:FLIR) doesn’t immediately ring up as an ESG investing play because the thermal imaging infrared camera specialist has significant ties to the military industrial complex. Even then, it can be argued that the company develops products that protect our men and women in uniform. As well, FLIR is instrumental in searching for missing people, a stirring and powerful narrative.
Further, ESG stocks can be downright awesome. Consider the incredible relevancy of Tesla (NASDAQ:TSLA). Yes, it’s a tech company at its core, but it also offers substantial positive environmental and sustainability implications. Arguably, when you’re blasting down the roadway (at a legally sanctioned event, of course) doing zero to 60 miles per hour in three seconds or less, environmentalism is the last thing on your mind. It just happens organically.
So, don’t let the haters deter you. Serious profitability is available through ESG investing strategies.
Focus on the Greater Good, Not the Trifecta
Generally, the more criteria you add to your must-have lists regarding ESG stocks, the less likely you’re going to find companies that meet your profitability goals. Therefore, it’s really important that you don’t have a check-the-boxes mentality that Smith referenced above.
But what about companies that fit more in line with what you might term anti-ESG investments? As we discussed, no organization is perfect. While some companies might rank highly with sustainability, they might rank poorly with governance (such as lacking diversity in the board of directors). But some organizations have downright poor reputations. Is there any hope for these firms?
A few weeks ago, I highlighted why Sociedad Quimica y Minera de Chile (NYSE:SQM) was an example of an anti-ESG play. Although I’m bullish on SQM stock, throughout its history, the mining firm has violated all three acronym components significantly. Notably, while SQM offers broader environmental benefits due to its association with zero-emission electric vehicles, it has done so through unethical means, such as advantaging indigenous communities, a big no-no for ESG investing.
Ultimately, though, what is considered an ESG stock is open to interpretation. Therefore, I wouldn’t get too hung up on the acronym when you come across a difficult-to-assess company. Rather, focus on the greater good. If the positives outweigh the negatives, you may want to give the target asset another look.
Employee Happiness Is an Underappreciated Barometer
In my discussion of anti-ESG stocks, I discussed the importance of analyzing employee satisfaction. It’s too easy for a company to send out a marketing message supporting social justice and equity when that’s the in-vogue thing to do. It’s a lot harder when you’re essentially alone in forwarding an unpopular but morally correct message.
But how do you figure out which organizations are talking the talk versus walking the walk? One of the best ways is to check out your target company’s employee happiness. For example, I highlighted Xerox (NYSE:XRX) as a company that doesn’t rate so highly as an ESG investing option due to poor employee satisfaction. I wrote:
In 2019, Money Inc ranked Xerox as one of the worst companies to work for. Reasons for this included job dissatisfaction, according to a Glassdoor survey. Also, only 36% of Xerox employees supported former Xerox CEO Ursula Burns. Now, the CEO approval rate is 54%, which is an improvement, but a significant letdown compared to other vibrant organizations.
I think it’s also telling that only 43% of Xerox employees would recommend a friend working there. Unfortunately, it appears the iconic firm is falling short of its governance protocols and social awareness. For a company to truly shine, it must raise employee morale. Otherwise, you’re just going to bleed talent.
But employee satisfaction also works the other way – it’s a great method to find ESG investing jewels! Remember, great organizations only thrive because they have great people. If they have great people, it likely means that governance issues – among other concerns – are taken very seriously.
Keep an Open Mind
Throughout most of its existence, Japan has been an insular nation. But for the last few decades, U.S. and western institutions have been pushing more diversity for Japan because western countries have a strong track record of diversity and with zero problems. Therefore, the land of the rising sun would also have zero problems with diversity.
Of course, this is silly thinking. Forcing diversity toward a country that has only known homogeneity is irresponsible. It’s the same reason why isolated tribes in the North Sentinel Island are protected. The risk of introducing pathogens to an indigenous people outweighs whatever benefits that could come from in-person contact. Pathogens in this case could mean well-intentioned ideas that just won’t work in foreign lands due to centuries-ingrained social mores.
But the consequence of being an insular nation is that it likely won’t produce many ESG plays because its ethos may not align with western standards of equity. So I was surprised to see that the Wall Street Journal ranked Sony (NYSE:SNE) as number one among the 100 most sustainably managed companies in the world.
With Sony becoming one of the best ESG investing ideas, it first disproves the notion that sustainability is somehow beta. Rather, SNE stock has provided much alpha since this year’s March doldrums. Second, you shouldn’t judge a book by its cover. Just because Sony hails from governance-challenged Japan (by western standards) doesn’t mean it can’t facilitate ESG development in other areas.
Social Media Is Key for ESG Stocks
Earlier, I mentioned that we live in a Yelp society. If a company does right, people will praise it. When it does wrong, the criticisms will come in hot and heavy. While some organizations ignore the negativity on Yelp, savvy businesses realized that social media is the key for success. And so it is with ESG stocks.
From my own experiences, I check Yelp reviews to see how an organization responds to criticism rather than how they respond to positive feedback. Look, anybody can show appreciation for kind words. But how an organization responds to valid criticisms – I’m not talking about obvious trolling attempts littered with bad-faith accusations – speaks loudly about its corporate ethics.
Therefore, if you want success with ESG investing, you’ve got to familiarize yourself with social media. And this really goes back to knowing your audience. According to Pew, most young people get their news from social media, whereas older generations get their information from traditional sources. If you want to know what relevant demographics think about various social issues, social media analysis is vital.
That’s not to say that you have to agree with everything on such networks. Consensus isn’t the point here but rather data gathering. The more information you have about what drives ESG stocks, the better your chances for profitability.
On the date of publication, Josh Enomoto held a long position in SNE.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.