It was approximately one year ago when the World Health Organization formally confirmed a global pandemic. Loss of human lives, economic pressures on families, businesses and governments have awakened the world to look for better solutions to address human rights, community impact, supply chains, climate change, and product innovations. Environmental Social Governance, the ESG theme appears to be the center focus of this massive shift of awareness for positive societal impact.
Over the last few years ESG thematic exchange traded funds issued by some of the largest asset managers have managed to consistently outperform the S&P 500 Index year-over-year. This shift in momentum became more profound when we looked closer at the last 52 weeks. The Vanguard ESG US Stock ETF advanced by an astonishing 53.04%, outperforming the S&P 500 Index by nearly 7.5% (as of 4/14/21).
Market Data providers have added ESG focused research designed to both transparently and objectively measure a company’s relative ESG performance, commitment, and effectiveness across 10 main themes (emissions, environmental product innovation, human rights, shareholders, etc.) based on publicly reported data. Investors are recognizing the increasing importance of ESG investment allocations for enhanced optimization in portfolio diversification.
As we look to the future it is important to recognize that leading the change back to the new normal will encompass a trend of positive societal impact. Some of the largest public companies have pledged to eliminate their carbon footprints over the next decade. Governments have begun to plan for emission-free transportation. Infrastructure will focus on sustainability and reliability. Supply chains will look for solutions to minimize waste, increase efficiency and offer the potential to drive down cost using technology as the foundation of changing processes. Health care systems will focus on predictive and preventive propositions vs the current reactive methodology in place for over a century. Technology companies will use innovation to disrupt industries by offering scalable low-cost digital tools. The social changes that are underway are directed to enhance performance while also implementing a work-life balance and providing more wellness related programs for employees. Companies are recognizing opportunities for change in their governance with diversity, equity and inclusion within their workforce, for example.
One specific example of a top rated ESG company is NVIDIA, a well-known technology business focused on graphics processing units (GPU) and artificial intelligence (AI). Minerals are something that NVIDIA uses extensively for its chips and cards; thus, NVIDIA is intricately linked to environmental and social issues related to mining. NVIDIA is a highly rated ESG company because it has a stringent policy regarding conflict minerals. The company has specific due diligence procedures to ensure that it never uses conflict minerals in its products. The company is also big on the governance aspect as it trains nearly 100% of its customer/supplier/partner-facing workforce for anti-corruption and anti-bribery.
ESG-mandated assets could make up half of all managed assets in the United States by 2025. Between 2018 and 2020, total U.S.-domiciled sustainably invested assets under management, both institutional and retail, grew 42%, to $17.1 trillion, up from $12 trillion according to the Forum for Sustainable and Responsible Investment’s 2020 trends report.
Leveraging the long-term investment opportunities surrounding the ESG framework has become a vital component of investment decision making. Corporate Social Responsibility will likely continue to gain momentum in today’s rapidly changing business environment. Companies that deal with ESG issues well may become more successful and therefore become more attractive to investors as they capitalize on a socially responsible future.
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