Profitable Investing With a Cause

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Recent social events are leading to rebranding … the increasing connection between social/environmental causes and investing … a specific ESG play from Neil George

 

Quaker Oats will be retiring its 131-year old “Aunt Jemima” brand …

 

 

Mars’ Food will be “evolving” its Uncle Ben’s rice brand …

 

 

ConAgra Brands has begun a “complete brand and package review” of its Mrs. Butter-Worth’s syrup …

 

 

And B&G Foods announced it will also conduct a review of its Cream of Wheat packaging. The image has been little changed since 1893 …

 

 

These changes stem from the spotlight on racial inequality that has taken center stage in recent weeks following the tragic deaths of George Floyd, Breonna Taylor, and Ahmaud Arbery.

We’re living through a period of history in which social concerns are having an enormous impact on corporate America.

But we’re also seeing greater corporate consideration for environmental concerns … for shareholder transparency … for worker safety … for companies that serve a broader social purpose beyond just bottom-line growth.

This wider consciousness is summed up by the acronym “ESG” — Environmental, Social, and Governance.

Here’s how Neil George described it in his recent issue of Profitable Investing:

Today, ESG is a both a category of companies as well as a scoring mechanism for companies.

The basic nature of ESG is that it is a means of investing that will not only provide growth and income, but it will do so in a manner that has a lighter environmental footprint, a greater positive contribution to society and is managed in a more transparent way while at the same time remaining focused on shareholders as well as other stakeholders.

It turns out, ESG isn’t just good for our world in a broad sense. According to Neil, it’s also good for investors’ returns.

So, in today’s Digest, let’s turn our attention to this interplay between investing and the greater good. Even better, given his usual generous manner, Neil has given me the greenlight to reveal specific ESG plays he likes today.

Let’s jump in …


***A primer on ESG

 

Here’s Neil with deeper dive into the ESG acronym:

Environmentally friendly means greater use or production of renewable or cleaner energy along with less impact in waste and material use. This is not a drag on most companies that continue to drive growth and more income from renewable and cleaner energy production.

Social concerns bring in the practice of involving more stakeholders in the decisions of companies. It means that companies are more aware of their impacts on communities as well as consumers. It can be a grab bag for lots of other causes, but at its core social responsibility should result in more favorable views of companies and treatments by governments and customers.

Governance includes better recognition of shareholders’ rights. This means independent boards of directors, more transparency in executive compensation and greater disclosure of company activities and financial conditions.

I’ve always been in favor of all of this, including separate CEO and Chairman of the Board positions, greater disclosure throughout the year and more information in the quarterly reports of business activities and finances, with less reliance on the very small print in the footnotes.

Even prior to the recent equality-oriented protests, ESG investing has been seeing a surge of interest.

For example, in February, Financial Times reported that ESG-focused equity funds had taken in nearly $70 billion of assets over the prior 12 months. Over the same period, traditional equity funds had suffered nearly $200 billion of outflows.

 

It’s likely that events from the last several months will accelerate this flow.

From CNBC:

ESG investing is predicted to surge following the coronavirus pandemic and demonstrations over racial injustice. Consumers and Wall Street investors alike are increasingly holding companies accountable for their performance on environmental, social and governance benchmarks — or ESG, for short.


***It’s one thing for individual investors to be behind ESG, but today, we’re seeing increased interest from institutions as well

 

In his issue, Neil explains that many institutions are run for the benefit of a variety of different cohorts, such as pension funds or endowments. And these beneficiaries are demanding that fund management invest more in ESG-compliant or ESG-focused companies. Given this, more fund managers are getting on board.

In fact, according to the 2019 RBC Global Asset Management Responsible Investing Survey released last fall, 70% of institutional investors in the U.S., Canada, and the U.K. now apply ESG principles to their investment decisions.

So, how are these ESG-themed investments doing?

A Morningstar study examining 54 sustainability-focused equity index funds found that 73% outperformed broader index funds.

And according to the managing director of the Defined Contribution Institutional Investment Association, ESG investments provide for more stable portfolio returns on average, with 84% of funds exhibiting lower volatility compared to non-ESG funds.

Neil’s own research supports strong returns from ESG:

You might think that by imposing additional ESG rules and standards, these companies would be laggards in the stock market.

Nope. If you look at the S&P ESG Index compared to the S&P 500 Index over the trailing three years, you’ll see that ESG outperformed the general market 33.25% to 32.73%.

 

S&P ESG & S&P 500 Indexes Total Returns –Source: Bloomberg Finance, L.P.


***Which stock does Neil like for an ESG investment?

 

Turning toward specific ways to play ESG, Neil points toward the “poster child of the ESG utility market,” NextEra Energy (NEE).

From Neil:

NextEra is the largest wind and solar power company in the world. It has renewables deployed in its regulated South Florida utility business and has used its unregulated business to sell clean energy across the US.

It turns out, NEE has been in the Profitable Investing portfolio since 2008. Since then, it’s up 541%, but Neil still believes more gains are coming.

For one reason why, NEE should be benefiting from a new IRS rule.

Back to Neil:

One of the areas of ESG that is particularly attractive to me is environmentally friendly businesses, particularly in the utility and energy markets. And this is about to get a whole lot more profitable under new Internal Revenue Service (IRS) rules that are going to apply to a line item of the Bipartisan Budget Act of 2018 (BBA).

Specifically, it involves section 45Q, which was first put forward back in 2008 but never really got clarification. It involves Carbon Dioxide (CO2) capture, storage and use.

Neil explains that under the new IRS rules, companies can earn a tax credit that’s transferable and saleable to the tune of $35 per ton of CO2 captured. One of the major sources of CO2 industrial production is coal-fired power plants — which NextEra still operates. This means it is in line to collect or sell the credits.

Keep in mind, NEE also yields almost 2.4%. So, while you wait for additional stock gains, you’re receiving a healthy income stream.

Neil likes NEE up to $264.50. As I write Wednesday morning, it trades at $243.48, so there’s plenty of room to get in. For more from Neil, click here.

Expect more spotlight — and more gains — from ESG investments in the coming quarters and years.

Have a good evening,

Jeff Remsburg


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/profitable-investing-with-a-cause/.

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