In last week's ESG & Climate report titled The Evolution Of the Plastic Industry Could Stall in 2022, we introduced our “new materials” stock index, and we have included our hydrogen index in this week's report titled, Hydrogen – Hype, Hope, and Headlines. We have created these for several sectors and each week we will add the chart below showing one-week and one-year performance for each index. Note that these are simple averages for each group and are not market cap-weighted. If we did a market cap weighting, we would have a couple of sectors where one stock dominated all - EVs for example. The steep decline in the EV index in 2021 was largely due to the negative performance of the Chinese EV companies that trade in the US and are included in the index. Note that all sectors have had a bad start to this year. We have chosen to include a water category as we have noted since we began this service that water is an area that we believe will be in greater focus going forward and will be considered an ESG topic.
Our meetings over the last couple of weeks confirm several developments within the ESG investing world, all of which have been the focuses of our prior work. The first is a very significant step up in ESG oversight among most fund managers, with dedicated ESG teams at many companies scrutinizing sustainability reports and other releases, looking for red flags either from inconsistencies in reporting or from departures from the fund managers standards. Second, there remains a lack of real empirical analysis that allows for accurate comparisons between companies and this stems from the fuzzy reporting frameworks that we have today and the lack of clear and actionable guidance from regulators. As we have discussed several times, the huge inflows into ESG funds and the proportion of overall funds market that now has a “social impact” overlay could lead to real disruptions and some rapid valuation changes if and when the regulators provide tighter guidance on both corporate reporting and fund labeling.
As we discussed in yesterday’s ESG and Climate report, the SEC has some challenges ahead, not just because there are high hopes that it will start mandating a change in terms of disclosure accuracy and consistency, as well as fund definition, but also because, as yet, it does not have the mandate to do so. All eyes are on the regional regulators, in the US, Europe, and other countries to police what is the wild west of reporting. The E piece of ESG is the major challenge and it is where corporates and fund managers alike are dealing with issues and measures that are likely very different company by company within a sector, let alone between the sectors themselves – it is far more complex and harder to analyze than, for example, board diversity.