In the first half of 2020, everyone was hearing about the work from home (WFH) start-ups and their likely success, not only during the lockdowns, but also after them. Many of these start-ups have fared well in the last few months, and some, such as Palantir and Zoom, have even been judged to be extremely overvalued by experts as a result. At the same time, the end of the year brought with it new trends associated not only with the pandemic, but also with the change of administration with the American White House. Thus, the arrival of the Biden administration promising more generous monetary stimulus, the increasing fear surrounding the devaluation of the dollar played strongly in favour of growing demand in the cryptocurrency market. Another important trend in the Biden era is an increase in the prospects for companies associated with “green” energy, as well as for ESG companies in general.
What is ESG
There is a stereotype that "money does not smell", and for the sake of profitability, an investor is ready to close his eyes to how this profit is obtained. However, today 95% of Americans in the 25-40 age group (the so-called Millennials and Generation Y) say that it is important for them to understand the social value of the company when investing money. Sociologists estimate that generation Y will inherit tens of trillions of dollars in assets from boomers and older generations in the coming decades. This is one of the reasons why in recent years the popularity of evaluating companies and funds according to the ESG (Environmental, Social, and Governance) criterion has grown. This category includes businesses that pay attention to environmental protection, healthy human relations within their company and in their interaction with customers, as well as an effective management organisation. By investing in ESG an investor is confident that their funds will be used in good faith, for the common good, and not for the prosperity of some people through the deterioration of the lives of others. ESG is an asset for those investors who are concerned not only with personal enrichment, but also with a non-aggressive, socially responsible way of this enrichment.
Last year was a bumper year for hedge fund launches. According to a Hedge Fund Research report released towards the end of March, 614 new funds hit the market in 2021. That was the highest number of launches since 2017, when a record 735 new hedge funds were rolled out to investors. What’s interesting about Read More
But how can you dip your toe in the water, should we say?
Approach 1. "Just Throw Out The Excess" - Profitability Raises Questions
The simplest approach to building an ESG fund is to take a broad general market index and simply remove dubious (in terms of ESG) companies. For example, take the S&P 500 index and throw out the "dirty" industry from it - non-electric vehicles, oil and gas and coal energy, tobacco companies, etc. This is how the S&P 500 ESG index came about. Despite keeping the number 500 in the name, in reality it includes about 300 companies. You can invest in it through such tracking funds as SPDR S&P 500 ESG (EFIV), Invesco S&P 500 ESG (ESG). However, their profitability is not yet very high.
For example, from February 1, 2019 to February 1, 2021 (over 2 years), the S&P 500 ESG added 44%, and the S&P 500 - 41%, which is almost within the statistical error. This is despite the fact that the S&P 500 ESG includes many top IT companies that have grown faster than others in recent years.
Of course, this example alone is not a reason to be disappointed in the very approach of compiling such indexes. ESG's approach is focused on the future, towards investments by millennials who are only gradually entering the market. The number of ESG funds itself has doubled since 2017, that is, issuers see potential in them. Nevertheless, for those who want to make money "as quickly as possible" there are already narrower, but much more profitable products.
Approach 2. Funds Of The "Right Industries". Green Energy Boom
The reverse approach to building socially responsible funds is to build them from scratch with relevant companies in a specific industry. And if the question, for example, about the psychological atmosphere in the company is difficult to analyse, then the relationship of the company with the environment is sometimes much more transparent. Especially if this company is entirely specialised in the "green" energy, which Biden loves.
The following fact speaks volumes about the growth of their popularity. At the end of September 2020, at a time of high uncertainty regarding both the pandemic and the presidential election, there was just over $8 billion under the management in "green ETFs", and by the end of the year - $18bn. The performance of certain well-known funds is also impressive.
In the same two-year period, the S&P 500 ESG gained 44%, NASDAQ First Trust Clean Edge Green Energy (QCLN) added 267%, iShares Global Clean Energy added 176% (ICLN), Invesco WilderHill Clean Energy (PBW) - 306%. A number of similar funds can be found here https://etfdb.com/etfs/industry/clean-energy/.
Before our eyes, the social responsibility of companies and, in particular, concern for the environment, is moving from the category of political slogans and idealistic dreams into a really significant investment factor. Investors who prefer such companies have a chance to jump significantly "above the market". And this is just the beginning. ESG's benchmarks are just making their first steps, but where a company's "integrity" is relatively easy to gauge - as in the case of green energy - investors can benefit right now, and the arrival of millennials is increasing the popularity of these sectors.
Article By Victor Argonov, senior analyst at EXANTE