There’s something to the notion that when it comes to the combination of large-cap stocks and environmental, social and governance (ESG) principles, growth equities loom large.
That much was on display last when, as growth stocks faltered amid rising interest rates, the S&P 500 ESG Index tumbled. However, that slump has more than been erased this year. With the help of resurgent communication services and technology stocks, among others, the S&P 500 ESG Index is higher by 21.22% year-to-date.
While there’s ample criticism of ESG investing strategies and rightfully so, advisors should not get bogged down in the political debate side of the ESG equation. That’s guaranteed to be off-putting to many clients. Just deal with the facts and one of those is some clients are unlikely to ever warm to ESG while other clients are embracing it and may want more of it in their portfolios.
With that latter point in mind, advisors have options for sourcing ESG leadership for ESG-enthused clients. Let’s explore one here.
ESG Leadership in Index Form
Advisors looking for enhanced large-cap ESG approaches may want to peruse the S&P 500® ESG Leaders Index – the “leadership” counterpart to the aforementioned the S&P 500 ESG Index.
Enhancements in the form include the exclusions of alcohol, casino gaming, fossil fuels nuclear power stocks. Among ESG equity indexes, those are fairly standard rejections, but those prohibitions have paid off.
“Now, taking a closer look at the S&P 500 ESG Leaders Index with its live performance data approaching 18 months since its launch, it also outperformed the S&P 500, by a cumulative 2.7%,” according to S&P Dow Jones Indices.
That performance is pertinent because surveys confirm that market participants remain enthusiastic about responsible investing, in particular, younger demographics who crave values-based investment solutions. That is to say advisors cannot take their eyes off the ESG ball. Not when clients are demanding access to these solution and not at a time when clients believe advisors are useful when it comes to attaining ESG advice and building portfolios to that effect.
For those clients, the good news is that data also confirm that companies that score well on the metrics employed by the S&P 500 ESG Leaders Index typically outperform their lower-scoring counterparts.
“The High ESG Quintile 1 and Q2 outperformed the S&P 500 by 1.9% and 3.1%, respectively, and the S&P 500 ESG Leaders Index overweighted these quintiles by an average of 9.1% and 4.9%, respectively, leading to a total contribution of 0.34% from allocation effects to these top quintiles,” adds S&P Dow Jones.
Exclusion Matters. So Does Inclusion.
As noted above, may traditional ESG benchmarks rely on exclusionary tactics and those gauges typically exclude the same cohort of stocks – alcohol/tobacco, fossil fuels, anything to do with betting, adult entertainment and nuclear power, among others.
However, what’s left over in an ESG benchmark and how it’s weighted are also meaningful. The S&P 500 ESG Leaders Index proves as much.
“Market participants sometimes consider ESG as being about avoiding the ‘worst,’” concludes S&P. “The S&P 500 ESG Leaders Index’s outperformance since launch suggests that there may be value in following the leaders, too.”
Related: Preparing Clients for 2024 Elections