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:
- Climate change and carbon emissions
- Air and water pollution
- Water Scarcity
- Gender and diversity initiatives
- Community relations
- Human rights
- Labor standards
- Data protection and privacy
- Board composition
- Bribery and corruption
- 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.