Is Activist ESG Investing Causing Market Mispricing?

Activist investing often sees large pools of money taking major stakes in companies and seeks to get representation on boards to effect change in the C-Suite. A new type of activist investing is really gaining momentum in the ETF world and that is the environmental, social and governance (known as ESG) form of investing. Companies today are given rankings on the degree of good corporate citizens they are. From equal gender pay to representation in management and what they do to minimize their environmental footprint and more.

Our upcoming roadshow is focusing on using ETFs to take a more active approach to investing. Active can mean “activist” in terms of voting with how you invest your dollars by way of ESG type investing. Active can also mean know when to make a bigger bet in one sector or one part of the world versus a more passive market capitalization approach. And more recently, factor type investing that selects stocks based on “the best” fundamental characteristics. Most BNN viewers are more familiar with ETFs as passive investment vehicles that simply track an index they know like the S&P 500 or S&P TSX. ETFs are getting blamed by “active” investors (stock pickers) for causing all sorts of mispricing. Because when you buy the index, you buy all the companies in the index regardless of their fundamentals. While this is true and I could not agree more that some of the weaker companies get bought with the index, the reality is that about 85% of investors that do select individual securities in the long run do not beat the index after fees, so the argument has less basis than some of the loudest voices claim. These are hard facts and cannot be disputed.

So when it comes to MISPRICING (and for us that means opportunity), in the area of environmental footprints, some great companies are getting mispriced and that is raising the interest of some long-time value investors.

Classic value investors like Sam Zell and Warren Buffett are rumoured to be looking at the beaten up energy sector for bargains. I take a value (or growth at a reasonable price) approach to markets, so charts like this capture my interest.

Going back to 2015 when WTI first crossed back below $50 (from $100+ in 2014), the total return of the ETFs representing the sectors have performed poorly and are priced today for WTI being closer to $30. The top part of the graphic is a percentage return (including dividends). The Canadian energy sector is trading at about 20% of the value it was at about 5 years ago when WTI first fell through $50. In the US, the sector is about 40% of the value. The main difference between the two are the pure (oil sands) E&P companies in Canada that have been hit much harder.

The biggest US listed ESG weighted ETF is ESGU and holds about U$3.6B. The energy sector weight is not zero as one might imagine. While it is lower than for the market cap weighted indexes like the S&P 500, some of the biggest holdings are still energy companies like XOM & CHV. Some of these companies are amongst the biggest investors in clean energy sources. Especially in these traditionally male intensive businesses, so me may be surprised to see some of these names in an ESG index. But the truth is, that the energy sector, in particular, has been hard hit from this ESG movement.

BMO recently launched a global ESG leaders ETF (ESGG), which has a few Canadian energy stocks in their selection (ENB, SU). For those looking for the companies that are likely to do better in the ESG world looking forward, the companies with the higher ESG rankings are likely to be amongst the winners.

ESG investing is likely going to be a major consideration for many institutional investors moving forward, but it is something that also appeals to millennials. I asked my 22 year old daughter is she would be ok investing her money with a slightly lower potential return as long as she was being ESG sensitive and the answer was a resounding YES! In the early days of ESG investing, the theme is creating some bargains and for the bargain hunters out there, we’d be biased to own the companies in the space with the better ESG footprints.

Our upcoming Spring BNN Bloomberg Roadshow will focus on how to include more active based ETFs into your portfolios. From ESG, Defined Outcome, to Alternative (long\short) each more active style has their place. Millennials might like to tilt portfolios towards a more environmentally friendly portfolio, where more risk adverse investors may like defined outcomes, while more adventurous may seek to make money in adverse conditions and might seek out alternatives. Come out to see how these new and growing areas of ETFs can be included in your portfolios.

Click here to register for free and as always, we ask for a voluntary donation in support of Dementia and Alzheimer’s research at the Baycrest Hospital to attend. We have raised more than $500,000 in the past decade thanks in part to BNN Viewers and a matching donation from Larry.


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