Broker Check

GameStop?! And the Rise of ESG Investing and Clean Energy Solutions

| February 05, 2021
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Keeping you “in the know” and “in the now,” we would like to call attention to speculative and volatile trading in certain stocks. In the last two weeks, stock prices in companies such as GameStop, AMC Theatres, BlackBerry and Nokia, among others, have experienced wild rides thanks largely to speculative trading, short trading and Reddit day traders. A group of young retail investors identified stocks like GameStop that had been heavily bet against, or shorted, by large corporate hedge fund managers. These investors banded together and bought the stocks. Typically, when a group of investors buys a stock, the price of the stock increases. Turn this scenario upside down. The mass of retail investors who bought stocks like GameStop caused price surges, which “squeezed” the short positions, creating inflated prices well above estimated fundamental values. In the last few days, however, the volatile trading markets have calmed down and stocks, such as the now recognizable GameStop, are not nearly as inflated.

Unconventional and entertaining indeed, but where do we go from here? When the market experiences unusual and extreme volatility as witnessed in this most recent movie-script-worthy event, it is imperative to recognize that an investment strategy focused on merit and thoughtful execution drives solid, long-term performance. Over the past few years, there has been an ever-growing movement toward sustainable investing. As of 2018, sustainable investment assets under management have grown to 30 trillion USD, up from roughly 23 trillion USD in 2016. Sustainable investing factors are environmental, social and governance, also known as ESG investing, and play a prominent role when selecting and managing assets in your portfolio. There are many different principles that are categorized under each factor and we have named a few below:

Environmental

  • Climate change and carbon emissions
  • Air and water pollution
  • Biodiversity
  • Deforestation
  • Water Scarcity

Social

  • Gender and diversity initiatives
  • Community relations
  • Human rights
  • Labor standards
  • Data protection and privacy

Governance

  • Board composition
  • Bribery and corruption
  • Lobbyists
  • Political contributions
  • Executive compensation

Although a relatively new concept, corporations across many different sectors have taken ESG principles very seriously. In doing so, a growing body of evidence has emerged that shows ESG investing strategies can lead to similar or outperforming results as compared to regular, non-ESG investing strategies. Many financial firms have started to create funds that reflect ESG policies and many asset managers offer U.S. Large-Cap Exchange-traded Funds (ETFs) that reduce exposure to companies that are poorly rated from an ESG perspective. In the chart below, you will see the MSCI KLD 400 Social Index, an index of 400 U.S. securities that provides exposure to companies with outstanding ESG ratings and has excluded those companies whose products have negative social or environmental impacts. The MSCI KLD 400 Social Index has slightly outperformed the S&P 500 over the last two decades.

 

 

 

Because of the growing interest in sustainable investing and ESG, sustainable index strategies have been simplified and expanded to fit investors of varying portfolio strategies. To give perspective, in 2019, there were 35 sustainable ETFs that tracked indexes globally. Since then, there are more than 300, a staggering increase (BlackRock, Bloomberg, as of January 2020).

With piqued intrigue, more companies have reported ESG information and sustainable practices. And, because companies are more inclined to disclose ESG metrics that help measure and communicate their efforts at managing risk and creating value through sustainability, this information feeds sustainable indexes. The graphs below show the increasing presence of quality ESG data from reporting companies.

Now you may ask yourself, “How can I align my goals with sustainable strategies?”

Good question. There are five ways investors can use sustainable index products as benchmark replacements and building blocks for their portfolio construction.

  • Screened: Clients are looking to exclude certain securities based on the business’ non-sustainable involvement and practices.

  • ESG optimize: Clients may invest in certain ESG securities that intend to pursue similar returns to a particular benchmark while gaining exposure to securities with high ESG scores.

  • ESG best-in-class: Clients seek to achieve concentrated ESG holdings by investing in top ESG companies with high quality scores.

  • Thematic: Clients pursue very specific sustainable themes based on how a company operates, aligning with their personal views.

  • Impact: Clients anticipate measurable sustainable outcomes adjoined with financial returns.

There are many subsets of sustainable and ESG investing, but one has been viewed as most important in the eyes of many – clean energy solutions. Clean energy is energy derived from renewable, zero-emission sources and does not pollute the atmosphere or environment. Clean energy can also consist of energy saved through energy-efficient measures. There are many different clean energy solutions including alternative fuel vehicles, bioenergy, hydropower, solar power, geothermal and wind power. An increasing consensus movement away from fossil fuels’ usage and employing alternative energy sources is drastically changing our energy landscape.

With a tried path in front of us, what does the future have in store for ESG investing and clean energy solutions? A study by the Deloitte Center for Financial Services has indicated that by the year 2025, ESG assets will have a market share of roughly 50% in overall professionally managed assets in the United States (Deloitte Insights. US SIF Foundation data; Deloitte Center for Financial Services).

To learn more about the newsmaking “David”-like day traders and the Goliath hedge funds’ takedown, ESG investing and/or clean energy solutions, we encourage you to connect with your financial advisor. We are experiencing the thrill of fascinating happenings and look forward to including you, our trusted clients, as players in our conversations.

Private Capital Group would like to thank you for your continued confidence and we look forward to seeing and hearing from you soon. 

We wish you a safe and healthy weekend.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Private Capital Group, LLC (“PCG”), or any non-investment related content, made reference to directly or indirectly in this communication will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Information contained in this communication is based on data gathered from what we believe are reliable sources. It is not guaranteed by PCG as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. Further, you should not assume that any discussion or information contained in this communication serves as the receipt of, or as a substitute for, personalized investment advice from PCG. To the extent discussed herein, investment indices are unmanaged and cannot be purchased directly. Historical performance results for investment indexes and/or categories are included for informational purposes only and generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  PCG is neither a law firm nor a certified public accounting firm and no portion of the communication should be construed as legal or accounting advice.  A copy of the PCG’s current written disclosure Brochure discussing our advisory services and fees is available upon request.
Please Note:  If you are a PCG client, please remember to contact PCG, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  PCG shall continue to rely on the accuracy of information that you have provided.
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