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Weekly Investment Strategy

Review the latest Weekly Headings by CIO Larry Adam.

Key Takeaways

  • Shareholders encouraging firms to take climate action
  • Greenwashing on the minds of SEC regulators
  • Favorable environmental scores a positive for info tech

Yesterday was Earth Day, and with more than 1 billion people across 192 countries participating in the celebrations each year, the holiday is the largest secular observance in the world! While the COVID-induced lockdowns were implemented to save lives, the human impact on the environment was realized during this time too, as pollution and water quality improved and rare wildlife reemerged, at times in some unexpected places (e.g., pink dolphins off the coast of Hong Kong, wild coyotes in the streets of San Francisco). These realizations benefitted the already surging wave of ESG (Environmental, Social, and Governance) investing that we highlighted in our Ten Themes presentation, and we stand by our expectation that this wave will not crest any time soon. With ESG investing garnering a substantial amount of attention since the start of the year, we want to focus on some of the progress we have seen in regard to the environmental component in honor of Earth Day.

  • Companies Planting Seeds For A Better Tomorrow | Headlines related to corporate climate initiatives have seemingly been released on a daily basis, with announcements not limited to certain sectors or industries. Some firms are finding ways to reduce their carbon footprint (e.g., Amazon purchasing 100,000 custom electric delivery vehicles and using them to deliver ~20 million packages in 2020), some are phasing out products that are not environmentally-friendly (e.g., GM eliminating gasoline and diesel light-duty cars and SUVS by 2035), some are transitioning into new business segments that are better aligned with climate goals (e.g., Exxon Mobil investing $3 billion through 2025 to launch a new lower carbon emissions technology business unit), and some are committing to projects to benefit the environment rather than their profits (e.g., Verizon’s goal of planting 20 million trees by 2030). The reasons firms are undertaking these actions vary (e.g., reputation, cost savings), but regardless, shareholders are encouraging both transparency and action. At the end of the 2020 proxy season, 90% of S&P 500 companies had published some type of ESG report, up from 20% a decade ago. As it relates solely to the environmental component, ~200 firms have referenced ‘climate change’ in their conference calls over the last six months, a number that had been consistently below 50 until 2019.
  • Biden Administration Renewing The Focus On Climate Change | Since inauguration, the Biden administration has taken steps to acknowledge our nation’s impact on the environment and climate change. They include the US rejoining the Paris Climate Accord, a freeze on the Department of Labor regulation that discouraged the inclusion of ESG-related investments in retirement plans, the US Treasury appointing a climate czar, and the proposed $2.25 trillion infrastructure plan including environmentally conscious components (e.g., retrofitting of buildings, solar technologies, electric vehicle charging stations). On Earth Day, President Biden pledged to reduce US emissions by at least 50% by 2030—more than double the target previously set under the 2015 Paris Climate Agreement. The virtual summit he held on Earth Day included 40 world leaders proactively discussing concrete climate action, and countries such as China, India, Japan, and Canada all outlined plans to reduce their carbon footprint as well.
  • ESG Forcing Regulators To Reshape The Compliance Habitat | The SEC has issued five public statements addressing the entirety of the ESG investment landscape since late February. Regulators have found inconsistencies in ESG-related proxy voting claims and insufficient levels of compliance for properly disclosing details for ESG investments. In the months ahead, we anticipate the SEC will take specific action to address the high degree of autonomy given to fund managers and rating agencies as it relates to ESG, in an effort to address ‘greenwashing,’ or false advertising of alignment with green values. Regulators may take cues from the actions by European Union authorities that have passed regulations outlining criteria for ESG disclosures made by investment managers, and are currently debating their own taxonomy in order to properly classify sustainable business activities.
  • ESG Investing Leaving Its Footprint On The Markets | Net inflows into ESG funds totaled $51 billion in 2020—more than double the 2019 total and more than 10x the 2018 total. Just this month, a new ETF geared toward carbon transition readiness was launched, and it saw a staggering $1.25 billion in inflows in its first trading day. But note that the fund’s top five holdings mirror that of both the MSCI USA Extended ESG Focus Index and that of the S&P 500. In fact, the five tech-oriented giants, Apple, Microsoft, Amazon, Alphabet, and Facebook account for ~20% of each index. As a result, the growing interest in ESG investing may serve as an additional catalyst for fund flows into one of our favorite sectors—Information Technology—as their environmental component scores are often more favorable relative to other sectors. But it is important to note that ESG principles aren’t limited to just equities, as the fixed income market is anticipating $1 trillion of ESG oriented bonds to be issued this year, which is even more remarkable given that cumulative green bond issuance since 2007 reached $1 trillion just last year.

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All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Past performance may not be indicative of future results.