Investors in ESG funds are no longer willing to sacrifice returns to achieve ESG goals, Cowen analysts say.
Environmental/social/governance (ESG) investing is clearly on the rise.
Investment flows into sustainable mutual funds and exchange-traded funds hit $70 billion last year, up 35% from $51.2 billion in 2020, according to Morningstar.
Cowen has put together a list of stocks composed of its best ESG investment ideas. It sees four major themes playing out for ESG this year:
· Deep links between climate change, fossil fuels, and geopolitics. “Russia’s brutal invasion of Ukraine has served to unmask the geopolitical and economic power of fossil fuel exporters, bringing these linkages into everyday conversation,” Cowen analysts said.
“Despite the grind higher in fossil commodity prices, we do not anticipate a major re-assessment of oil and gas in ESG investment frameworks. Rather, we anticipate ESG to maintain its negative outlook on fossil fuels while continuing to press for an acceleration of renewable alternatives.”
· Investor demand for fund-level impact. “Historically, impact investing has been identified as one pole of the ESG spectrum, where asset managers accepted concessionary returns in exchange for clearly identifiable environmental or social impacts,” the analysts said.
“We believe this positioning is rapidly changing…. ESG investors are arguing more forcefully that the historically preconceived negative relationship between impact and returns … is inaccurate.”
· Increased disclosure requirements. “Mandatory ESG disclosure standards are set to tick higher,” the analysts said. The European Union already implemented them, and the U.S. may be headed in that direction, the analysts said.
· Focus on assessment of human capital performance. “Successfully assessing a company’s ‘S’ pillar performance has remained elusive,” the analyst said. “Until human capital can be properly assessed, ESG frameworks are likely to remain less valuable in these sectors.”
The Cowen stock list of best ESG investment ideas includes, among others:
1. Alaska Air (ALK) – Get Alaska Air Group, Inc. Report;
2. BioMarin Pharmaceutical (BMRN) – Get BioMarin Pharmaceutical Inc. Report, a biotechnology company;
3. Cummins (CMI) – Get Cummins Inc. Report, an engine maker;
4. Expedia (EXPE) – Get Expedia Group, Inc. Report, an online travel shopping company;
5. Johnson Controls (JCI) – Get Johnson Controls International plc Report, a building equipment company;
6. Lam Research (LRCX) – Get Lam Research Corporation Report, a semiconductor machinery company;
7. Planet Fitness (PLNT) – Get Planet Fitness, Inc. Class A Report, a fitness club chain;
8. Ralph Lauren (RL) – Get Ralph Lauren Corporation Class A Report, an apparel company;
9. Workday (WDAY) – Get Workday, Inc. Class A Report, a software company;
10. Yum! Brands (YUM) – Get Yum! Brands, Inc. Report, parent of restaurant chains including KFC, Taco Bell and Pizza Hut.
