There are not many investment-related topics that spark fervent emotions. Most people will agree that saving more, spending responsibly, being diversified, and having a plan are important. Some recent developments, though, require a closer examination before we, as investors, form an opinion. Environmental, Social, and Governance considerations (ESG) are one of those topics.
I hear the opposition all the time: “Save the environment? That’s hippy talk! And “Why do we keep talking about fair pay? That’s all propaganda.”
While we all may have differing opinions on climate change and humanity’s effect on it, or whether the rights of workers in other countries and even here at home are something we should be concerned about, the issues are far more nuanced and run deeper than many people consider beyond the talking points from our favored news outlet.
Consider, if you would, that over the last several months, we have experienced more than a handful of events that exemplify the need to pay closer attention to the role of ESG and stewardship as it relates to the companies that we choose to invest in. These events have significantly impacted publicly traded equities and cannot be ignored.
First, let’s examine the August wildfires in Europe, which affected Greece, Spain, Italy, and Portugal and caused significant damage to frequently visited tourist destinations. TUI AG, the world's largest tour operator, saw its stock price fall from roughly $15.91 on 3/17/23 to $5.57 on 9/19/23, almost 65%, as estimates that canceled travel would cost the company approximately 25 million Euros, and uncertainty around the full impact of the damage and lost revenue to both the company, and business frequented by tourists. This isn’t to suggest that the fires were caused by humans, but a hot, dry summer contributed to the severity of the wildfires. Environmental impacts on corporate earnings cannot be ignored.
FedEx, UPS, and the major U.S. automakers also feel the sting of ignoring ESG, specifically the “Social” aspect.
FedEx has experienced a 300% increase in insurance costs due to rising accident claims with its contractors over the last ten years1.
UPS lowered its full-year revenue guidance by $4 billion and issued a profit warning after announcing a new 5-year labor agreement with the Teamster Union, representing over 300,000 employees. UPS agreed to raise wages, improve working conditions, and offer more paid vacation. That announcement was accompanied by a decline in its stock price from nearly $187 in late July to almost $158 in mid-September.
Finally, Hawaiian Electric Industries Inc. faces lawsuits that accuse the company of neglecting maintenance and required service of its power lines, possibly contributing to what became the deadliest US wildfires in more than 100 years, killing over 100 people. In August of this year, the company's shares fell 20%, and private placement bonds related to the utility traded between 40 and 60 cents on the dollar. Even tax-exempt municipal bonds fell to a price between 63 and 65 cents on the dollar as fears of financial difficulties and potential liability swirled2. Would more responsible governance on the part of management or the Board of Directors possibly have reduced the impact of the fires if maintenance and upgrades had not been deferred?
Professional investors are beginning to recognize that incorporating Environmental, Social, and Governance factors into their investment process is increasingly important when considering risks in today’s world.
If investors are willing to set aside the “talking points” espoused in the media and take a close look at the impact that ignoring ESG can have on a company, and its long-term viability, they may just realize how important it truly is.
When ESG considerations first emerged as an investment philosophy, many investment managers used what is know as “exclusionary ESG,” meaning they simply chose not to invest in companies that were “ESG offenders,” or that fit into categories like Alcohol, Tobacco, Firearms, Gaming, etc.
The more modern approach to ESG is more nuanced, called “inclusionary ESG,” it starts by examining a company’s process and approach toward being responsible stewards of the environment or community, focusing on respecting workers and keeping corporate leaders accountable for governance. When you peel back the onion layers, you might be surprised to see that many companies receiving high ESG scores come from the Technology, Energy, Medical, and Consumer Products sectors.
ESG need not be a “dirty word,” and it shouldn’t spark the vitriol it does in some of us. The bottom line is that companies that focus on the sustainability of their business model, profits, and the well-being of their employees and community are the companies that will naturally score well in ESG factors and likely reward investors for a long time to come.
Environmental Social Governance (ESG) investing has certain risks because the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller. The return of an ESG strategy may be lower than if the advisor made decisions based solely on investment considerations. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. Please note that individual situations can vary and therefore this information should only be relied upon when coordinated with individual professional advice. All indices are unmanaged and may not be invested into directly.