By Andrey Dashkov, CFA, analyst, Casey Research
It stands for “environment, social, and governance.”
Now… those three words might put you off. It may bring to mind hippies or so-called “tree-huggers.”
But don’t let yourself be driven away from a hugely profitable rising trend because of the stigma attached to those words…
At the core, ESG is about socially responsible and environmentally sustainable investing.
That means investing in companies that have a long-term strategy of doing business in a sustainable manner.
What does that have to do with anything?
Well… first and foremost, it’s companies that want their business to survive any regulations related to the environment, diversity, and corporate transparency.
Now, we may not be fans of government overreach… but we are fans of companies with a long-term outlook.
They’re prepared to deal with stricter government requirements – and are one step ahead of the rest of the market.
They see where things are going, and aren’t burying their heads in the sand.
They aren’t trying to make a quick buck this quarter at the expense of shareholders’ long-term profits and well-being.
Let’s say the government decides to impose or increase a carbon emissions tax tomorrow.
ESG companies’ net profits won’t take a major hit… because they aren’t emitting too much in the first place. Or, they figured out a way to offset their emissions in other ways to protect their bottom line.
In other words, they’re savvy. That’s what ESG is all about.
Here’s another example.
If the government decides to make executive pay structures more transparent, these companies will be the ones who’ll address those requirements easily. They’ve already done most of the work anyway.
So, beyond all the talk about how these companies are taking care of the environment… social issues like labor practices… and governance stuff like board diversity… is a simple market mechanism.
Because at the end of the day, shareholders benefit if the stocks they invest in aren’t the subject of unexpected regulation or lawsuits.
And in the long term, it pays to be proactive…
Over a Trillion Dollars Today… And That Will Look Like Nothing Tomorrow
The total amount of money invested in this trend stands at over one trillion dollars.
And it’s still in its early days…
One trillion dollars may sound like a lot. But it’s just over 2% of the total amount of money global investment companies manage.
PwC, a multinational consultancy, says that ESG funds will outnumber conventional ones by 2025. And they’ll manage at least $9 trillion, nine times more than they do today.
I wouldn’t be surprised to see this trend get 20% of the global market share.
If it does, I expect immense return potential for investors…
Even These Stalwart Industries Are Moving Toward Sustainable Investing
In a nutshell, ESG is about long-term investing… and thinking about what industries will be the winners of the global markets five, 10, or 20 years from now.
And no matter what you may think about it personally, all the signs are pointing toward sustainability.
Total SA, a major oil company, has this picture on its homepage (like I showed earlier this month):
Source: Total SA
This picture should give you a clue. One of the world’s largest oil companies is building wind turbines… right next to its oil platforms.
It’s a signal: change is coming.
Just take a look at how interest for ESG investing has surged over the past few years. The chart below shows what Google calls an “Interest Index.” It runs on a scale of zero to 100, and shows how search activity for the term “ESG investing” has grown over time.
You may need a little more convincing.
Here’s Larry Fink, CEO of BlackRock (which manages over $7 trillion in assets).
In a recent letter to shareholders, Fink wrote that BlackRock is taking the following steps:
…Making sustainability integral to portfolio construction and risk management; exiting investments that present a high sustainability-related risk, such as thermal coal producers; launching new investment products that screen fossil fuels; and strengthening our commitment to sustainability and transparency in our investment stewardship activities.
And back in June, BlackRock launched a suite of exchange-traded funds (ETFs) that screen for companies with high ESG “scores.”
So if even oil companies and trillion-dollar asset managers recognize this megatrend… it’s time you took advantage of it, too.
The ESG Trend Is Here to Stay – And You Can Ride It to Profits
You may not agree with ESG… or buzzwords like “sustainability”… or even like the underlying trend. But we’re here to make money.
And you can’t argue with the facts: The world is moving toward clean energy.
Oil companies like Total SA are turning themselves into cleaner “energy companies.” BlackRock is committing to sustainability.
And the best way to profit off this ESG trend… is to think about the commodities powering it.
For example, it’s clear that electric vehicles are the future. Their sales are set to rise from 1.7 million units in 2020 to 26 million units ten years from now. That’s a 15x increase.
Those cars will need lithium to store electric energy… copper to transfer it… aluminum to build the exterior… and so on.
And the batteries that power them will lie at the heart of the new economy.
Because they won’t just power cars. They’ll also be installed on boats… drones… and even attached to our houses…
I wouldn’t be surprised to see this market grow exponentially…
How to Use This Trend to Make Life-Changing Returns
The global electric battery market will likely grow by 25% a year for the next five years. By 2025, the market’s expected to reach $155 billion.
And as ESG investing becomes more popular, it will drive innovation and investment in sectors like the electric battery market.
I see two ways to play this right now.
First, take a look at iShares MSCI Global Impact ETF (SDG). It’s an ETF that invests in ESG companies, and will give you broad exposure to the ESG megatrend.
Second, check out the Global X Lithium & Battery Tech ETF (LIT) to get exposure to the battery market. It holds a portfolio of companies related to lithium, from mining to battery production.
Just be sure to position size appropriately, and don’t bet the farm.
Andrey Dashkov, CFA
Analyst, Casey Research
P.S. The world is changing due to COVID-19…
My colleague Dave Forest is even stuck behind the Canadian border right now due to travel restrictions. But that doesn’t mean his team isn’t fanned out all over the world…
In fact, one of our analysts recently visited a remote desert to get a look at a $35 billion fortune. Silicon Valley companies are circling this location. And it’s at the center of the growing ESG megatrend I discussed above…
For all the details on how to profit, just go right here.