ESG in the era of COVID

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The year is 2020. The world is engulfed in and trapped by the novel coronavirus, better known as COVID-19. This infectious disease has put billions of lives at risk, millions out of work, and thousands of companies stranded and scrambling to face this new era. It’s pretty bad.

Well, maybe not. Don’t get me wrong, just one life lost to COVID-19 is too many. However, for humankind as a whole, this pandemic is accelerating changes to lifestyles and efficiencies that we couldn’t dream of. Our physical home, Earth, has benefited from the lockdowns caused by COVID-19. Thus, the continued rise and prominence of the ESG industry and companies further aligning themselves to ESG standards. Here we discuss the backdrop of ESG as a whole, its performance in the age of COVID, and the future.

ESG: What is it?

First things first, what the heck is ESG? ESG is short for Environmental, Social, and Governance. These criteria are a set of standards for a company’s operations. Environment being the company’s impact on the environment, including its carbon footprint, or its total greenhouse gas emissions and its sustainability. Social being the company’s relationship with employees, suppliers, and communities where it operates, benefitting those who it works with. Governance being a company’s leadership, pay among executives, and gender equality. These terms have become a common part of the modern language is second nature to younger demographics. Essentially, ESG determines whether a company is a “good person.” The common thought-process is: “If I can buy something AND help our planet, that’s awesome. I’ll take two!”

ESG has gained prominence in the past five to ten years, largely due to ambitious, younger generations seeking to reduce the negative effects of emissions and human activities caused by years of careless actions. Business leaders and executives have responded. A 2010 survey of about 120 businesses showed that 69% of businesses took deliberate measures to improve their environmental and social impact. That raises the question of why? Why this sudden pivot and emphasis on ESG standards? Well, 58% did so to create “community goodwill” and more than 90% of the businesses surveyed realized cost savings directly from their green programs. It makes perfect sense! Executives realized they can maintain, and even optimize, performance for lower costs through sustainable practices.

This migration to ESG was backed through the Paris Agreement, a historic accord adopted by nearly every country in the world in 2015 to combat climate change and its negative impacts with a goal to reduce global greenhouse emissions. Doing so helps to reduce the global temperature increase to a limit of 1.5° Celsius. This agreement has helped to raise awareness to older populations of the adverse effects to our planet caused by some careless actions, and the path to reversing these wrongs.

More and more consumers and producers alike have seen firsthand how beneficial a shift to ESG can be. This has been most prominently exemplified through the COVID-19 pandemic.

Performance

Without a doubt, this virus shocked nearly everyone. Nobody was prepared. You couldn’t have predicted something like this to this magnitude. Consumers and producers alike ran around like headless chickens for nearly a month. The S&P 500 Index, which tracks the 500 largest companies on US stock exchanges, lost over 1,000 points in just over a month. Fresh off all-time highs, nine months of gains erased in the blink of an eye.

S&P 500 Index Performance YTD (Source: MorningStar)

Markets have rebounded since the March lows, largely because once you’ve hit rock bottom, the only direction you can go is up. However, this new era ushered in by COVID hasn’t been doom and gloom for all. The ESG space has been a bright glimmer of hope for all through these trying times.

With everyone confined to their homes and working from home, global carbon-dioxide levels dropped by 8.3% in the first four months of 2020. Hour long commutes are a thing of the past. Traffic? Forget about it! Production and transportation came to a screeching halt in efforts to stop the spread of the virus and meet lagging demands. The new economy carried by the ESG industry has boomed.

Let’s breakdown the ESG industry performance in this new age.

S&P 500 Index Performance YTD vs. Selected Companies (Source: Yahoo Finance)

This graph compares several selections of publicly traded companies and their performance in relation to the S&P 500.

First, Beyond Meat ($BYND), has soared to new heights this year, easily outpacing the S&P 500 Index. This company produces plant-based meat substitutes. In a time where meat factory workers are becoming ill and the meat supply chain is stalling, Beyond Meat proved superior in both taste and quality. Why would I buy a hamburger if an Impossible Burger tastes just as good and doesn’t contain meat? Meat production has consistently proven to have adverse effects on the climate. Consequently, Beyond Meat is here to stay.

Second, Enphase ($ENPH), an energy technology company that designs and manufactures software-driven home energy solutions has roared. As traditional energy sources and oil producers took a massive hit to demand because of COVID, investors and consumers alike flocked to clean energy. Clean energy, which includes solar panels, is far more viable than traditional energy as it draws energy from renewable resources, meaning the resources cannot be depleted. One day, the world will run out of oil. And when it does, people will migrate to hydrofracking and shale. This last-ditch attempt will produce results but is again unsustainable. After this, there truly will not be any oil or gas remaining. Clean tech is not just a winner during a pandemic, but a champion for mankind for the long haul.

Next, Slack ($WORK), a business communication platform, has beautifully navigated the virus. This platform enables employees to work from anywhere in the world and complete tasks for their company. Perfect for a stay-at-home world. As people are confined to their homes, Slack has become essential to the survival and operations of companies worldwide. As more companies consider permanently working from home, Slack is a winner. Remember the name.

Now, Ford ($F), an automaker, has plunged and underperformed the S&P 500 due to the pandemic. Showrooms aren’t open. Cash is tight for the millions who have lost their jobs. These gas-guzzlers simply aren’t necessary nor in demand right now. This old-world staple is struggling to keep its head above water. Perhaps it’s time to drive away.

Here, Tesla ($TSLA), an electric vehicle and clean energy company, has rocketed during the COVID-19 pandemic. A company famed for its remarkably fast vehicles with zero emissions struck a chord with consumers, and they bought in. Although demand is low for cars, clean tech is more appealing than ever. In addition to producing electric vehicles, Tesla plays a prominent role in the solar industry. Again, when traditional energy sources are so volatile, clean tech is too attractive to pass up. This young company is already worth more than Ford and other car manufacturers in terms of market cap. Not to mention, having a home built around clean tech and energy essentially enables individuals to live off the grid. In a world we privacy is scarce, clean energy and privacy is the ultimate winner.

Lastly, $JETS, an exchange-traded fund that tracks companies involved in the airline industry, has been crushed due to COVID-19 and has easily underperformed the S&P 500. When travel bans are in place worldwide, the airline industry is inevitably going to take a hit. Furthermore, airplanes are huge oil and gas consumers, emitting tons of carbon into the atmosphere every year. Although necessary, this sector remains volatile and isn’t as attractive or versatile as the ESG industry.

BlackRock’s CEO Larry Fink addressed climate change and its significance, alerting people to take note. BlackRock is the world’s largest asset manager. Fink states that BlackRock is pushing this shift to ESG to the forefront, saying, “Every government, company, and shareholder must confront climate change.” Read the letter in entirety here.

Investments

ESG has nearly become a requirement for new companies. No one wants to be part of the company that is harming the planet we call home. More and more VCs are scouring for the next big company focusing primarily on ESG.

Most recently, Oprah, has contributed $250 million to Apeel Sciences. Yes, you read that correctly. Apeel Sciences is leading the way in sustainability by reducing food wastes through the creation of a coat layer to add life to plants. This round of funding drives Apeel’s valuation to over $1 billion, making it a unicorn. Funding for startups overall has slowed due to the pandemic, but those in the ESG space have seen the opposite. If Oprah is doing it, it’s gotta be right.

Future

Clearly, the ESG space is poised to grow at an even more rapid rate than previously thought. With clean and socially responsible companies taking initiative, a new era is being ushered in and the old economy is crumbling. Not only are they solving current problems, but these companies aligning themselves with ESG standards are spearheading change.

Patagonia is one of the most prominent apparel companies in the world, chiefly because of its emphasis on preserving the planet. CEO of Patagonia, Rose Marcario, has been an environmental and sustainability advocate for years. With the current administration in the United States turning away from new climate initiatives, even pulling out of the Paris Agreement, Marcario has refused to back down. Marcario has used her position and company to protest government decisions which combat ESG trends and has been effective in doing so. Patagonia has invested in sustainability through its subsidiaries and VC arm. The launch of Patagonia Action Works seeks to make this ESG space more accessible and make the masses more aware. As more and more companies embrace ESG standards and grow in size, more climate advocates will join alongside Patagonia. This trend proves the ESG industry’s dominance and its position to thrive. Now, more than ever, is the time to shift primary focus to ESG and continue onwards and upwards.

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