The ESG crowd is in the driving seat for stock investments and debt issuance, and we see no reason for this to let up. While there are contrarian investors, they run the risk of buying unloved high cash flow and high yield stocks that just see the yields expand over time. These companies can buy back stock and potentially outperform through the excessive return of cash to shareholders, or they could be taken out in a consolidation, but it could be a long wait. If we assume that ESG scrutiny is here to stay and that data gets better, as does the analysis and comparability of the data, the “getting better” fund may be the more interesting path. Companies with good cashflows but also good strategies to improve their standing on the environmental and sustainability front may offer the best of both worlds – a potential ESG kick in multiple eventually, plus a high payout while you wait. The recently announced Blackrock funds which we discussed a couple of weeks ago seem to foot the bill. We are assuming that Blackrock will not be alone in this game and companies that have made it into these funds could see more demand for their stock as other managers mimic Blackrock.
With the official approval of SEC Chairman Gensler, we would expect to see some fairly swift action to clean up some of the ESG reporting standards, and this probably signals the end of the majority of ESG metric and ranking providers – we are still of the view that the market will ultimately need no more than 4 or 5 and the current large data providers are likely to win. Any ESG rater or ranker with some special sauce (technology/algorithms) will likely be acquired and the rest will fade away, in our view.
The chart below, which is referenced in our Weekly ESG and Climate report today, is interesting as the increase in “social” labeled funds may have something to do with the issues with measuring both environmentally and sustainably “good” companies and the limited number of equities that fit clearly in those categories – a “social” label may provide some definition flexibility.
Source: Refinitiv, Socialfintech.org,
