ESG Does Not Change With The Weather… It’s The New Investing Climate

ESG Does Not Change With The Weather… It’s The New Investing Climate

January 19, 2022
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Market and Seeds Recap of 2021

Last year was a very good year for equity markets. The S&P 500 turned in its sixth best full-year performance since 1990, and markets finished at record highs on 70 different days. It was a steady climb, with only a few pullbacks in the early and later parts of the year. The economic recovery continued at a robust pace, with real GDP growth at its strongest levels since 1984. Earnings growth of more than 50% for S&P 500 companies also supported the market climb. 

Later in the year, there were emerging concerns about Covid variants and inflationary pressures. However, investors are more willing to look through any short-term disruptions from Covid. Looking ahead, the market faces tougher comparisons and will be challenged to see further earnings growth or multiple expansion into a rising interest rate environment.  

On average, Seeds US Large Cap portfolios beat the S&P 500 Index for the second year in a row. In 2021, Seeds US Large Cap portfolios on average rose 30.8% vs. 28.7% for the S&P 500 and compared with an average of 26.2% for large cap blend sustainable mutual funds (based on the Morningstar universe of 43 funds, institutional share class). Meanwhile, less than 15% of active managers beat the S&P 500 last year

Seeds is extremely satisfied with our performance despite headwinds last year from inflationary pressure, supply chain disruptions, Washington legislative gridlock, and the ongoing Covid pandemic. Technology exposure was a highlight within Seeds portfolios, with strong performances from Jabil (+65%), ASML (+63%), Keysight Technologies (+56%), and HP (+53%). Other notable stocks in 2021 include CBRE Group (+73%), Home Depot (+56%), Morningstar (+48%), Eaton Corp. (+44%), and Waste Management (+42%). 

Source: Factset. (*) 2020 returns calculated from inception date on March 23 to December 31.

Underperformers were in the renewable energy sector, with Vestas Wind (-36%) and Orsted (-20%) under pressure in a rising oil price environment. The consumer sector also had a couple of weak performances from Adidas (-21%) and Danone (-5%). Looking ahead to 2022, our rules-based framework continues to prioritize companies with a strong sustainability profile, visibility into revenue and earnings growth, and reasonable valuations. 

Sustainable Fund Flows Remained Strong In 2021

Sustainable investment inflows are on track to hit $70 billion in 2021, up 37% from $51.1 billion in 2020. According to Morningstar, sustainable investment fund flows are averaging $15 to $20 billion per quarter. Importantly, ESG funds continue to see strong inflows while other non-ESG investments are seeing outflows. At year-end, the ESG space had over $340 billion in assets under management in ESG funds with about 60% under active management. That said, more of the growth in recent quarters has favored passively managed funds and ETFs. Looking ahead, we expect another strong year in 2022 for the ESG space, with continued fund inflows into both active and passive styles.

Key Sustainable Investing Areas To Watch In 2022

Looking ahead, we expect the sustainable investment landscape to rapidly evolve and gain more legitimacy among investors.  In Larry Fink’s Annual 2022 Letter to CEOs, he notes that focusing on stakeholder capitalism (and not just shareholder profits) is not about politics or a fad, but good for business and the bottom line.

  • Regulations Are Coming. The SEC is expected to endorse mandatory climate disclosures this year. Implementation should take place by the 2023-2024 timeframe. Disclosures are expected to cover a range of climate-related risks, opportunities, and metrics (such as Scope 1 & 2 emissions). Stringent disclosure requirements are also expected to discourage companies from greenwashing. Standardization of disclosures should also lead to more confidence in ESG reporting and thus further investor demand. 
  • Climate Continues To Dominate Investing. Climate change dominated news headlines in 2021 with severe weather, wildfires, floods, and criticism of COP26 for lack of decisive action. Climate continues to be the main sustainability issue targeted by investors. Looking ahead, we expect investors to get more savvy on climate with carbon analysis of portfolios and increased use of analytical tools to assess physical risks. 
  • Businesses Align Around Net-Zero. Net-zero investing is poised to become the dominant sustainable investing theme. This involves companies transforming the business model to accelerate a transition to net-zero emissions. The challenge for investors will be to identify companies that have a smooth pathway to net-zero. Simply picking companies with ambitious 20-year goals is not going to be good enough. 
  • Retail Investor Participation Grows. Sustainable investing has been led by institutional investors in recent years. However, 2022 could be a turning point as more retail investors align investments with their values. Continued growth of ESG investment products is expected to drive more retail participation. Financial advisors can also play an important role as sustainable investing becomes more widely accepted. 
  • Harmonization Of Reporting Standards. Back in 2021, SASB and IIRC merged to form the Value Reporting Foundation (VRF). This will lead to common mapping of sustainability metrics for both US and global investors. By mid-2022, VRF and the Climate Disclosure Standards Board are expected to merge to form the International Sustainability Standards Board (ISSB). The ISSB is expected to develop a common framework and is expected to be the benchmark for sustainability disclosures. 

What Seeds is doing. Seeds is well positioned for 2022 as our investment process already considers both quantitative data as well as fundamental research of companies.  We look forward to increased data consistency via regulation and believe the market and investors will even further reward businesses that focus on net-zero and take action on climate goals.  Looking ahead, we continue to support advisors and investors by launching additional investment products (international, small cap & mid cap equity) and also incorporate additional data sources to make our investment process even more robust. 

Individual Stock Snapshots

Below we feature quick snapshots of stocks added to Seeds portfolios during 2021 that contributed to Seeds’ investment outperformance.

Anthem pushing for more equitable health care access. ANTM was a strong performer and finished up 49% in 2021. During the first quarter of 2021, we added Anthem (ANTM) to several Seeds portfolios. Anthem provides life, medical, and hospital insurance plans and offers network-based managed care health benefit plans to employers of all sizes. In 2021, Anthem is expected to see 14% revenue growth and 15% EPS growth. We like ANTM given its growth profile and reasonable valuation at 16x forward P/E. From a sustainability standpoint, Anthem is strong in corporate governance and diversity & inclusion. We also like the company’s focus on improving health care access for disadvantaged populations.

Schneider Electric is the energy efficiency play. Schneider Electric (SBGSY) is an energy efficiency company that we added in early 2021. The stock was up 39% for the year. Schneider generates sales of nearly $33 billion through energy management and industrial automation services. The company is a world leader in energy efficiency and has set a goal to help its customers cut carbon emissions by 800 million metric tons by 2025. This is among the most ambitious climate targets of any company in Seeds portfolios. The company is on track for 46% EPS growth in 2021 and continued double digit growth in 2022. 

TE Connectivity has good sustainability practices across the board. TE Connectivity (TEL) is a connectivity and sensors solutions company serving the transportation, industrial, and communications sectors. We added TEL in early 2021 and the stock was up 33% last year. TEL has a decent growth profile with 6% revenue and 10% EPS growth. The company has a good sustainability profile with a focus on reducing water stress and cutting GHG emissions 18% by 2025. The company also aims to be in the top 15% of global manufacturing companies in terms of workforce engagement and inclusion metrics. 

Taiwan Semiconductor outperforms on better fundamentals. In May 2021, we sold Intel (INTC) and bought Taiwan Semiconductor (TSM). Intel has fallen behind other competitors in the race to develop next generation chipsets. As such, we were concerned that Intel could see market share erosion. The company’s 7 nanometer CPU is delayed 2 years until 2023. Intel also plans to spend $20B to build its own foundry in Arizona. Meantime, other competitors are rolling out 5 nanometer and 3 nanometer products starting in 2022. Taiwan Semiconductor has a leadership position in the industry and a top-tier sustainability profile. Since the date of our trade, INTC shares declined 6% while TSM shares appreciated 7%.

To Read More Download The Attached Seeds Q4 Investment Commentary

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