The current pandemic could be a boost for ESG investing according to a report published by Nasdaq.
The article also suggests that companies that have behaved well to their employees, customers and communities will benefit most once the crisis is over.
In the US, opportunities in ESG could be enhanced for three reasons. They highlight:
1. ESG measurement is imperfect allowing investors can capitalize on the confusion.
Data providers assign headline ESG scores to thousands of companies globally, but there are shortcomings: Ratings are based primarily on company disclosures and they are not always comparable, as scorers apply their own methodologies. Given the room for interpretation, investors can overlay their own analysis and uncover potential opportunities.
2. ESG value is not fully reflected in stock prices.
Valuations and ESG scores for stocks showed little correlation suggesting some stocks are not correctly priced. ESG as a price driver also varies by sector. This gives investors the chance to analyse ESG components to identify the materiality of each and the extent to which they may or may not be reflected in stock prices.
3. ESG is here to stay
Once ubiquitous, the opportunity will be in anticipating changes to ESG scores.
ESG issues will impact company fundamentals and valuation multiples. Environmental concerns, for example, can result in changes to consumption preferences, which in turn affect revenue and operating margins. Once ESG is more fully reflected in market pricing, the opportunity will be in predicting changes to ESG scores.