What Happens To Your ESG Investment When Money’s Tight For Others?

Updated: Nov 3, 2020

Forbes.com EDITORS' PICK|58,483 views|Jul 11, 2020,10:43am EDT Chris Carosa Senior Contributor

No matter your age, you invest for only one reason: to accumulate wealth. Anything else is charity.

Not that there’s anything wrong with charity (and faith and hope and all those other good things). Charity puts food on other families’ tables. Investing—good investing, smart investing, successful investing—puts food on your family’s table. And if you’re really good, smart and successful at investing, you can accumulate enough wealth to put plenty of food on both your family’s table and other families’ tables.


So-called “ESG”-based investing is treated seriously by many, including, judging from the many investment products touting their ESG affinity, many investment firms. Some even argue ESG-based investing produces more favorable investment returns than traditional financial-based investing. This may be true, if only for a very financial-based reason.

Any product that hits its groove attracts investors. When Apple AAPL +0.7% tore off its corporate suit and “changed everything” with the iPod (then the iPhone, then the iPad, and, pretty much, the i-anything), its stock took off. Hot products produce hot companies which leads to hot stocks.


All good, smart and successful investors pay attention to consumer demand. It doesn’t matter if those consumers are retail or business, a product that suddenly emerges into “must have” status means sales. For the company doing the selling, that means profits. For investors, profits mean favorable returns.


It’s as easy as that. Find a product boosted by surging demand, then ride that wave.

Right now, ESG-based investing is just such a product. As a result, it’s easy to confuse the story with the finances.


While environmental, social and governance (the “ESG” in ESG) may not appear to have a direct impact on revenues and profits, they very well may.


“Many investors have been raised in a society that has become increasingly aware of a variety of risks that affect the environment and social behavior & well-being and financial outcomes for companies,” says Robert ‘Bob’ Smith, CIO and President of Sage Advisory Services in Austin, Texas. “They have also come to understand the importance of good corporate governance, disruptive product innovation, and creative approaches to resource or time management. All of these elements are identified, evaluated, and beneficially highlighted through the effective ESG risk assessment application in the investment process.”

You can easily imagine how this zeal for ESG-based investing suggests companies might profit from selling ESG-based products. These products can range from organic foods to electric cars.


It’s not just actual products. To establish an ESG appeal to its entire product line, a company might take actions that align themselves with causes positioned to show support for ESG issues. Of course, investing in these “ESG-affiliates” does pose some risk.

“In some cases, we see statements from companies making products that when you make your purchase from them the company will donate funds to an ESG cause,” says Stephen Akin of Akin Investments, LLC in Biloxi, Mississippi. “In the event the company doesn’t follow through on those donations, then buyer’s remorse will set in and turn the young consumer away from the product they once loved.”


It’s not just failure to follow-through on philanthropic promises that can hurt companies. Changing definitions of acceptable behavior can resurface decades-old statements that cause one to cringe in today’s society. Endorsing the wrong political candidate or belonging to the wrong political party can lead activists to call for a boycott of an otherwise upstanding “good citizen” company.


“Any sort of scandal, however minor, can set off a firestorm of negative press for a company,” says Kathleen Owens, of Aurora Financial Planning & Investment Management LLC, in the San Francisco Bay Area. “Companies are boycotted for what a company executive Tweeted, board members are pressured to resign if they mis-speak. Groups of people have become very organized in coordinating a pushback on a company that they are displeased with.”

The greatest risk when it comes to ESG-based investing, however, lies in the greatest risk to ESG-based products. It’s one thing to be a good story stock, but that story has to be implementable.

“Younger consumers may desire to purchase products that align with their ESG goals, even if they are more expensive,” says Ryan Brown, partner at CR Myers & Associates in Southfield, Michigan. “If, however, those products are not as readily accessible to purchase, as easy (or easier) to use or will promote that goal in a truly scalable way, younger purchasers will likely shy away from them.”


Worse for higher cost ESG-based products is the awful reality of economics can come down hard, especially when the economy heads south.

“Younger generations are becoming increasingly skeptical and frugal after witnessing the 2008 financial crisis and recent coronavirus market drop,” says Brown. “If you’re asking them to spend more money on a product that they could otherwise purchase in a cheaper, generic version, that product best be able to accomplish those goals in a material fashion. You don’t see many Generation Z individuals driving a Tesla TSLA +2% (yet).”

It’s not just the coronavirus market drop, it is the impact the pandemic has had on certain sectors in the marketplace. This is particularly acute for those just entering the job market in states that have had trouble re-opening. Can those people, (in many ways the target market for ESG-based products), afford to pay for the luxury of supporting their favorites causes? And, if they can’t, what kind of financial impact will that have on the companies that sell those products?


“COVID-19 may put a damper on younger people spending according to their beliefs,” says Derek Horstmeyer, an Assistant Professor of Finance at George Mason University’s School of Business in Washington, D.C. “For those that are newly unemployed or have faced pay cuts it is now more difficult to pay extra for a good that aligns with their belief.”

Finally, what happens if we discover the appearance of ESG altruism is just that—an appearance, not a reality?


“The answer to this question may lie in a research project that one of my students just did,” says Michael Edesess, Adjunct Associate Professor, Division of Environment and Sustainability at Hong Kong University of Science and Technology. “She surveyed a couple of hundred subjects (mostly young and college-age) about their feelings about the ‘greenness’ of five different fashion brands. She found, surprisingly, little or no correlation between their beliefs in their greenness and their proclivity to buy them. Upon direct questioning of a few of the participants in the survey, she found that their preferences about other features of the products overwhelmed their preferences about their greenness. They may say they prefer green products, but when it comes down to it, they just want them to be stylish.”


Fashion, perhaps, provides the key to successful ESG-based investing. Fashion brands occupy a long spectrum from “bargain-basement” to “luxury.” Good, smart, and successful companies sell brands along that entire spectrum. Those companies with sustainable marketing strategies understand that you cannot sell luxury items using the same techniques that sell bargain-basement products. The same holds true for production and distribution systems.

Business models differ for high-margin products and low-margin products. At this point, ESG-based products appear to be high-margin products. Successful ESG-based investments will therefore be in companies that show they can implement a high-margin product business model.


Otherwise, if they’re dependent on consumers’ willingness to continue to pay a premium for ESG, they may be in for a dreadful surprise the next time we hit a broad-based recession.



https://www.forbes.com/sites/chriscarosa/2020/07/11/what-happens-to-your-esg-investment-when-moneys-tight-for-others/#77bda9083534

brokercheck_edited.png

Privacy Policy. 

Akin Investment never sells your information. All information gathered on this website is for the purpose of helping our clients and nothing is shared or sold to any third party. We value our clients trust and privacy.

 

This web site contains links to other sites. Please be aware that we are not responsible for the content or privacy practices of such other sites.  We encourage our users to be aware when they leave our site and to read the privacy statements of any other site that collects personally identifiable information. 

 

External links disclaimer. Throughout our site you will find links to external websites Although we make every effort to ensure these links are accurate, up to date and relevant, Akin Investment Advisory cannot take responsibility for pages maintained by external providers.  Please note that external links from this website are provided as a courtesy. We take no responsibility for information contained on external links from this website. 

 

Registration or subscriptions

In order to use certain sections like our “Book online” feature on this website, a user must first complete the registration form.  During registration a user is required to give certain information (such as name and email address). This information is used to contact you about the services on our site in which you have expressed interest.  At your option, you may also provide demographic information (such as gender or age) about yourself, but it is not required. 

Legend

This site is intended for clients and interested investors residing in states where Akin Investments, llc is qualified to provide investment services. Akin Investments, llc is a Registered Investment Adviser, located in Biloxi, Mississippi registered with the State of Mississippi. Akin Investments, llc may conduct business in those states or locations in which it is registered or qualifies for an exemption or exclusion from registration requirements similar to or as provided for under established de minimis rules.

 

Akin Investments, llc website in no event shall the presence of this website on the internet be interpreted or construed as a solicitation to provide investment advisory services outside of the State of Mississippi, South Carolina or outside of those states with an established de minimis rule. If you have questions on your specific situation please reach out to Akin Investments, llc at (228)-229-5020.

 

Akin Investments, llc does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Akin Investments, llc. web site or incorporated herein, and takes no responsibility therefor. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

  

https://www.akininvestment.com
  • LinkedIn Social Icon
  • Facebook Social Icon
  • Twitter Social Icon
  • Pinterest Social Icon
  • Instagram Social Icon

228-229-5020

310 Abbey Court, J 8, Biloxi, Mississippi 39531

All Rights ©2015-2020 by Akin Investments, LLC. Proudly created with Wix.com