By Andrey Dashkov, analyst, Casey Research
This is a turning point for millions of investors.
And it will influence how trillions of dollars in investment funds are spent.
We have seen this coming for a while now.
About a year ago, I said that ESG (or environmental, social, and governance) investing started gaining momentum:
No matter your personal opinion on it, more and more investors pay attention to [ESG] factors. […]
Investment titans like Bill Gates have launched billion-dollar venture funds that finance startups tackling climate change and other challenges.
And Michael Bloomberg has been pushing to add ESG criteria into his company’s terminals so that investors can compare companies based on their ESG scores.
But the impact of ESG goes beyond individual investors or data providers… There are unstoppable forces driving money into ESG.
Bloomberg Intelligence estimates that ESG assets could reach $41 trillion this year.
This is a trillion-dollar trend, and it’s not going away.
But investors need to keep this in mind: There’s no single, right way of evaluating ESG companies yet.
It’s a problem and an opportunity.
The Securities and Exchange Commission (SEC) is finally stepping up its game and introducing climate disclosures.
They should help investors get a better idea of which companies are “clean” and which ones aren’t.
In a moment, I’ll tell you why this is significant and how to profit from what’s coming.
This Will Move Waves of Money
The SEC is going to make public companies disclose how much greenhouse gases they emit. Independent third parties will need to verify this.
Think of it as an emissions audit.
It will include two numbers: First, how much a company emits directly. Second, how much indirect emissions are produced from purchased electricity or other forms of energy.
These numbers will surprise investors. And could potentially lead to major changes in institutional portfolios.
In other words, I expect investors will love some companies and sell others based on what’s included in these reports.
For example, consider a hypothetical “ESG-friendly” utility that sells electricity. I’ll use the British Columbia-based BC Hydro as an example because that’s where I live.
As the name suggests, the company has something to do with hydropower, which is supposed to be clean.
But some reports have said that not all the electricity BC Hydro sells comes from hydroelectric sources. The company also buys cheap electricity from third parties and resells it to customers. And that electricity comes from natural gas or coal.
This flies in the face of the company’s “clean” status. If the company traded publicly (it doesn’t), I would expect massive investor activism pushing for a shift toward the clean energy that the company’s name suggests.
If the SEC solution becomes mandatory, a lot of investors will be surprised. Both on the positive side and the negative.
As always, the companies that are already ESG-friendly will benefit. The ones that try to “greenwash” their activities, like BC Hydro was reported to do, will be exposed.
How to Play This Shift
The new SEC rules haven’t become law yet.
But once they do, large-scale institutional investors will start rebalancing their portfolios given the new information.
Some companies will fall out of favor… And others will get a stamp of approval from the ESG investment community.
Regardless of where you stand on the issues of climate change, you can’t argue with trillions of dollars’ worth of capital moving around.
The best way to benefit from this realignment is to prepare.
As always, I urge you to look at the stocks you hold and research where they stand on ESG.
As a shareholder, you can even email investor relations executives and ask about those companies’ climate policies, targets, and dates.
Do your due diligence and start considering any ESG-related numbers.
ESG reporting rules are the new GAAP, the “generally accepted accounting principles.” So, it makes sense for you to understand greenhouse gas emissions metrics, much like you should pay attention to a company’s net income or cash balance today.
To profit from this emerging megatrend, you can use an exchange-traded fund like the iShares MSCI USA ESG Select ETF (SUSA). It holds a portfolio of 187 large- and mid-capitalization U.S. companies that have developed and implemented ESG practices.
Analyst, Casey Research