- The ESG category is a key area of focus for retail and institutional investors.
- Brand Relevancy ratings that incorporate ESG & other intangibles offers investors an edge.
- In a $44 trillion consumer spending global economy, high brand relevancy seems to add more portfolio value than traditional ESG-only offerings.
Doing well by doing good is a wonderful investment theme. In a wild and crazy world with high uncertainty and widening income inequality, I wanted to focus on a key investing trend that is only gathering more momentum as time goes by. Ignore Environmental, Social and Corporate Governance (ESG) factors at your peril Corporate America. In a world where passive ETF’s garner significant flows, if your company gets screened out, you lose a key factor that drives stock prices higher – more buyers than sellers. Companies should be focused on all the ESG factors because it’s the right thing to do not because it could benefit the stock with more flows but having this focus, for whatever reason, will ultimately make companies better. The chart below highlights the significant interest in ESG investing.
If you already invest in ESG strategies, you will notice it feels good to invest in companies that try to do well by doing good. I’m a data junky and something struck me when I looked at the available offerings for investors: most performance of ESG strategies look a lot like the S&P 500. There’s nothing wrong with that and if I can get index or slightly better returns via companies that think the way I do, there’s real value in that process. What if there were other strategies that incorporated ESG and other important corporate variables but also had a history of more consistent and significant outperformance versus the indices?
To be fair, it’s always been odd to me when I hear that investors are just now thinking about ESG factors when making investment decisions. Why invest in bad companies run by people who do not care about society, that treat employees poorly, and are selling goods that are detrimental to society? Just for the profits? Shouldn’t we be able to find companies that run the business the right way and not have to sacrifice strong returns? I think I can prove the answer is yes, particularly where the most admired Brands are concerned. In fact, I think I can enhance the ESG theme and drive better performance by focusing on our proprietary Brand Relevancy Rankings which incorporate many of the important ESG factors. My research indicates this could be a 1+1=3 windfall for investors.
In a global economy where $44 trillion per year is spent on consumption, there’s significant rewards given for the brands that resonate with consumers the most. That’s the beauty of our Brand Relevancy Scoring System, you get some spectacular business ideas for investment purposes. In many cases, the most relevant brands became relevant by having the most important ESG factors inside their corporate DNA long before it was fashionable. There’s always room for improvement but a company becomes a Mega Brand by doing the right things for its employees, shareholders and customers. Companies that rank the highest in brand relevancy offer the ultimate ESG investment opportunity. Let’s define ESG and high brand relevancy so we can see what kind of value can be created by combining the two philosophies.
- E – environmental factors such as climate change, greenhouse gas emissions, and energy efficiency.
- S – social factors such as supporting its local community, encouraging employee participation, and strong working conditions for employees. There’s additional focus on gender equality which is terrific.
- G – corporate governance factors such as adhering to important accounting methods, stockholder transparency, and avoiding conflicts inside the corporate boardroom.
High Brand Relevancy defined:
- Brands with a culture of innovation.
- Brands with visionary leadership.
- Brands addressing a global market opportunity.
- Brands that sell products and services that appeal to as many age cohorts as possible.
- Brands that have built high customer loyalty and brand love.
ESG comparisons. Let’s set the stage. The top three ESG ETF’s by assets are: ESGU, USSG, and SUSL with about $11.5 billion in assets currently. We know most of the flows in ETF’s go to the largest, most liquid offerings so I think it is important to understand where the flows seem to be going. Here’s the results using the earliest common inception date of the ETF suite beginning 3/6/19 and ending 6/30/20. Not too shabby, investors got the exposure to the companies that fit their needs and they received generally better returns than the S&P 500 Index. I like what I am seeing so far.
Let’s compare that to the results of the Mega Brands screen from our Brand Relevancy Scoring System. I weighted the screener 50% to the ESG factors and 50% to the above brand relevancy factors that tend to lead to a company becoming a Mega Brand. It’s important to understand this is a hypothetical look-back and the Top 30 ESG/Mega Brands is what our system says is the top 30 now. This could have changed during other periods when I ran the screen but it gives you an idea of how much value can be added to a ESG approach when narrowing the scope of ESG to the global consumption theme that drives the global economy. The Top 30 hypo portfolio is equal weighted and no rebalanced for the period 3/6/19 to 6/30/20. Here’s the same results:
The 30 Brands (listed below) that scored high in this scoring system were these highly admired companies. Also, important: just because a screen says we should own something does not mean the stock is right to own at the current time or economic environment. All screens are just the beginning of our research and not every great brand is always a great stock. Looking at the current environment though, most of these great companies seem like great stocks to own today, many of which are in our portfolios (this can change at any time). What a great group of businesses. Happy July 4th!
Proctor & Gamble
Bank of America
McCormick & Company
Here are some bottom-line takeaway points for investors to consider:
- ESG investing will only grow in popularity and investors do not have to sacrifice returns to invest with a mission. There are many options to choose from and most offer at least Index returns.
- The most relevant brands have important ESG factors embedded in their DNA making them a great choice for investors with an ESG focus.
- Brands with high relevancy and top ESG scores have a history of strong performance versus the broader market and versus the most popular ESG ETF’s.
This information was produced by and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.