NEW YORK: Almost anyone who closely tracks US financial markets these days is aware that environmental, social and governance (ESG) is under withering fire from the right.
Republican politicians in red states like Florida and Texas have taken aggressive steps to punish companies that say they adhere to investing strategies related to ESG factors.
The GOP contends such efforts to incorporate sustainability into corporate decision making unfairly comes at the expense of fossil fuel giants and gunmakers, among others. They also claim it hurts shareholders.
These efforts, in tandem with those of powerful industry lobbies, are having an impact.
Flows to ESG-focused funds are much lower than they were just a few years ago.
Globally, a net US$5.4bil has been invested in ESG-labelled exchange-traded funds (ETF) in 2024, down from US$15.6bil in the same year-earlier period, according to data compiled by Bloomberg.
But a funny thing happened on the way to the stock exchange. Analysts at Bloomberg Intelligence recently discovered the ESG score of one of America’s premier equity benchmarks is actually improving.
The addition of Amazon.com Inc to replace Walgreens Boots Alliance Inc strengthened the Dow Jones Industrial Average’s ESG profile, given Amazon’s higher ESG score and heavier weighting within the stock average, said analyst James Seyffart.
“Though it’s unclear whether ESG factors play a role in the index committee’s decisions, three of the last four constituent changes strengthened the Dow average’s ESG metrics,” Seyffart said.
He was referring to the move made about four years ago to replace Big Oil heavyweight Exxon Mobil Corp and Raytheon Co in the Dow average with Salesforce Inc and Honeywell International Inc.
In a statement, S&P Dow Jones Indices said ESG analysis plays no role in determining what stocks are added to or removed from the Dow industrial average.
Still, only one fossil fuel company – Chevron Corp – remains in the Dow. Such limited representation of a sector that’s home to the chief culprits of global warming is helping the stock average maintain a better ESG profile than the S&P 500 and the Nasdaq 100, Seyffart said.
It remains an open question, however, as to whether a higher ESG score translates into better market performance.
So far this year, the average ESG-labelled ETF focused on equities was up 8% as of May 31.
That underperformed the 10.6% advance of the S&P 500 over the same period. But both bested the Dow’s paltry 2.6% gain, according to data compiled by Bloomberg.
The Dow’s low return has been tied to stocks such as Salesforce, which plummeted almost 20% on May 29 after the company projected the slowest quarterly sales growth in its history.
The news heightened concerns that the company will be left behind in the artificial-intelligence boom.
S&P Dow Jones Indices, which oversees the Dow average, said companies are only added to the price-weighted index if they have “an excellent reputation, demonstrate sustained growth and are of interest to a large number of investors”.
Maintaining “adequate sector representation” is also a consideration in the selection process. Changes are made on an as-needed basis, as opposed to an annual or semi-annual reconstitution.
The recent change increases the Dow average’s exposure to the consumer retail industry, as well as other businesses, given the breadth of Amazon’s operations from selling goods of all stripes to running the world’s largest cloud-computing enterprise.
In its Feb 20 press release announcing Amazon’s arrival, S&P Dow Jones Indices said adding the eCommerce behemoth reflects, among other things, “the evolving nature of the American economy”. — Bloomberg
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