What a Trillion-Dollar Investor Group’s Climate Warning Means for ESG Stocks
Corporate ESG factors — that means environmental, social and governance considerations — are quickly becoming a metric to measure investment decisions. So, when asset managers with $10 trillion under their watch raise a red flag about a company’s exposure to physical climate risks, investors need to take notice. ESG stocks are not going away anytime soon.
That’s the case after the Institutional Investors Group On Climate Change (IIGCC) wrote to 50 companies worldwide with a warning.
The IIGCC wrote to each of the companies and asked them to properly identify and better respond to events such as droughts, extreme heat and flooding. These are occurring with greater frequency and severity as a result of man-made climate change.
In its report, the investor group also provided a framework to guide investor engagement with companies and “published a set of expectations for all companies on building resilience to physical climate change risks, including scenario testing and reporting against a set of risk metrics,” according to Reuters.
Climate Considerations for Individual Investors
For the individual investor, how much can and should climate considerations factor into their stock choices?
“Good investors will use these initiatives to detect risks and screen their portfolios, Mark Segal, CFA, founder and editor of ESG Today, told InvestorPlace. “Retail investors can clearly take advantage of the trend of increased engagement by their institutional counterparts on climate issues, both in terms of revealing risks that may have been otherwise unknown, but also by driving action on the part of the targeted companies,” he said.
The former sell-side research analyst was previously head of U.S. equities at Delaney Capital Management. As part of the firm’s ESG team, Segal was responsible for assessing and tracking sustainability factors that affect portfolio companies, as well as evaluating companies for portfolio inclusion.
“You can find the top-10 holdings of a fund pretty easily online,” San Francisco-based Sonya Dreizler recently told website KCM. She is a consultant who has worked on ESG practices with companies and their advisors. “Sometimes a client will find things in there that they’re very opposed to and wouldn’t have known about until they looked inside.”
We’ve crunched the names and the numbers on the 50 companies identified using data from Four Twenty Seven, part of Moody’s ESG Solutions. Our analysis included ratings and scores generated by Morningstar unit Sustainalytics and MSCI’s public ESG Ratings corporate search tool. All data shown below is as of Sept. 24.
Rankings of ESG Stocks Raise Eyebrows
One of the companies that received the letter from IIGCC is Campbell Soup Company (NYSE:CPB), which made me say, “hmmm.”
How is it that a company that has long been an advocate for sustainability and access across society ended up among the 50 companies highly exposed to climate risk? How is it that Campbell Soup is ranked as an “ESG Leader” by MSCI, but given a medium risk rating for sustainability on Sustainalytics?
To get into the exact numbers, CPB stock’s Sustainalytics score was 22.45, with carbon from own operations cited as one of its top three material ESG issues. Comparatively, its MSCI Rating was “AA,” making it a “leader” fin the food products industry.
The disparity could be occurring because there’s not much agreement on ESG investment metrics.
“You’re going to find a lot of things that are labeled green or environmental or sustainable and we haven’t gotten to the point yet where there’s much-enforced regulation around naming,” Dreizler told KCM. “So just because a mutual fund or ETF is called ESG and has a picture of a tree on their website, that’s not enough to know that it will match your values.”
In fact, as recently as Aug. 4, InvestorPlace contributor Josh Enomoto cited CPB stock as one of the best ESG stocks to buy. “Indeed, the company has long been an advocate for sustainability and citizenship across all echelons of society, well before it was cool to do so,” he wrote.
Similarly, The Clorox Company (NYSE:CLX) was targeted by the global investor group. At first blush, it might be easy to assume the maker of household cleaners would have some environmental challenges.
Yet the company, which was a big early pandemic winner, is ranked as a “leader” by MSCI ESG Ratings for its overall product carbon footprint. However, the metrics firm does put CLX in the “ESG Laggard” category for packaging material and waste issues.
“Today, the availability of information is much better, and sustainable funds are available everywhere,” wrote Joachim Klement, CFA, earlier this week. “The hard work today is less about identifying which stocks or funds are sustainable, but which ones of the many sustainable funds are engaged in greenwashing and which ones do a really good job.”
Still-Nascent ESG Stocks Battle Myths
To be sure, ESG stocks — like climate change — have their doubters. In May, website Visual Capitalist published a “fact check” on the “The Truth Behind Five ESG Myths,” which I highly recommend reading.
“As ESG investments continue to play an even greater role in investor portfolios, it’s important to focus on data rather than prevailing ESG myths that are not backed by fact,” writer Dorothy Neufeld noted.
Similar sentiment was voiced by ESG Today’s Segal. “Truly savvy investors will discover significant opportunities by potentially identifying climate champions, who can lead on the development of climate solutions and adaptation strategies,” he said.
But be careful. Last month, The Wall Street Journal reported that regulators are looking closely at the data used to analyze companies on ESG factors.
On the date of publication, Robert Lakin did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
InvestorPlace contributor Robert Lakin is a veteran financial writer and editor, including previous stints with Bloomberg News and as a buyside equity research editor. His Substack newsletter, TLV Strategist, covers the Israel business scene.
