ESG Investing: Some Noteworthy Companies & the Wave of Interest Behind the Sector
- What is ESG Investing?
- Some noteworthy ESG companies including: C3.ai, Green Monday, Rivian Automotive, LLC, Sila Nanotechnologies, and Upstart.
- The outperformance of ESG-focused companies, since 2013
- Greenwashing and other considerations to be aware of
- The growth in interest of ESG-related funds and the wave of support coming from investors like billionaire activist investor Bill Ackman, CEO of Pershing Square.
Learn which institutional private equity funds on our platform are investing in companies that seek to have strong ESG principles.
What is ESG Investing?
ESG is the consideration of environmental, social and governance factors alongside financial factors in the investment decision-making process.
ESG investing integrates and embraces social and environmental issues into existing business models and strategies with the underlying rationale that running a responsible business will drive better investment outcomes in the long run, and that it is possible for corporations to be profitable and still do good in the world.
For many people, ESG investing goes beyond a three-letter acronym to address how a company serves all its stakeholders: workers, communities, customers, shareholders and the environment. “Identifying the impact, positive or negative, on these five stakeholders is what should become the measuring stick for quality ESG investing,” says Mike Walters, CEO of USA Financial.
Some Noteworthy ESG Companies
C3.ai (IPO) (NYSE:AI) is an artificial intelligence company that makes software for companies to optimize and streamline their operations with machine learning. It offers a set of software services that help customers rapidly and successfully design, develop, provision, and operate enterprise and commercial AI applications at a small, medium, and large scale. It is also a family of applications for banking, like anti-money laundering, cash management, credit approval, broker rule compliance and has applications for utilities, like distributed energy resource management, AI-based predictive maintenance, and smart grid analytics.
C3.ai’s cornerstone contract is with energy services firm Baker Hughes (NYSE:BKR). This contract mandates that Baker Hughes buy $450 million of services from C3.ai over a five-year period. C3 had received $47 million of this Baker Hughes money at the time of the IPO, with the other $403 million pending. Furthermore, it scales up over time; Baker Hughes will buy $150 million of services from C3.ai.Using that huge contract with Baker Hughes along with high-profile customers such as the U.S. Air Force, C3.ai went public last fall. Commenting on the Baker Hughes deal C3.ai’s CEO, Thomas M. Siebel, stated “The oil and gas sector is undergoing a digital transformation to improve efficiencies and increase safety, while simultaneously reducing environmental impact.”
Green Monday Holdings, a manufacturer of plant-based pork substitute products and frozen meals and an operator of a chain of vegetarian-focused retail outlets and cafes, said it has raised $70 million in financing from investors, including TPG’s The Rise Fund and the massive conglomerate Swire Pacific. It’s one of the largest investments in a plant-based meat replacement company headquartered in Asia and comes as investments into companies developing alternatives to animal proteins continue to surge. Other investors in the round include CPT Capital, Jefferies Group and Sino Group’s Ng Family Trust, along with previous corporate and celebrity investors like Lee Kum Kee Health Products Happiness Capital, the singer Wang Leehom, James Cameron and environmental activist Mary McCartney.
Rivian Automotive LLC is an electric vehicle maker and automotive technology company that develops vehicles, products and services related to sustainable transportation.
In January 2021, the Michigan-based electric vehicle startup said it closed a $2.65 billion investment round led by funds and accounts advised by T. Rowe Price Associates Inc. Fidelity Management & Research Co. LLC, Amazon.com Inc.'s Climate Pledge Fund, Coatue Management LLC and D1 Capital Partners LP, as well as several other existing and new investors, also participated in the round.
The latest investment values Rivian at about $27.6 billion, Bloomberg News reported. Rivian has raised $8 billion since the start of 2019. The automaker is set to launch its first products this year: the R1T electric pickup truck, R1S electric SUV and a fleet of last-mile commercial delivery vehicles for Amazon.
Sila Nanotechnologies, a Silicon Valley battery materials company, has spent years developing technology designed to pack more energy into a cell at a lower cost — an end game that has helped it lock in partnerships with Amperex Technology Limited as well as automakers BMW and Daimler.
Sila Nano has developed a silicon-based anode that replaces graphite in lithium-ion batteries. The critical detail is that the material was designed to take the place of graphite without needing to change the battery manufacturing process or equipment. The material can store a lot more lithium ions, which would theoretically allow one to increase the energy density — or the amount of energy that can be stored in a battery per its volume — of the cell. The upshot would be a cheaper battery that contains more energy in the same space.
Now, Sila Nano, flush with a fresh injection of capital that has pushed its valuation to $3.3 billion, is ready to bring its technology to the masses. The company has raised $590 million in a Series F funding round led by Coatue with significant participation by funds and accounts advised by T. Rowe Price Associates, Inc. Existing investors 8VC, Bessemer Venture Partners, Canada Pension Plan Investment Board, and Sutter Hill Ventures also participated in the round.
Upstart is trying to rewrite the playbook on consumer credit. Rather than relying on historical data to create a simple scorecard, Upstart uses artificial intelligence (AI) to improve the credit decision-making process and increase access to lending for the masses. Upstart itself is a lender, but it also partners with banks and allows them to use its AI software to help improve offers to clients, thereby increasing approvals, driving down loan default rates, and reducing interest rates for the borrower. Since the application and approval processes are automated, the company's AI-based platform remained in high demand even during the pandemic. Investors have responded as the share price has had a strong 280% since its December 2020 IPO.
ESG-Focused Companies See Higher Returns, According to MSCI
Worldwide, ESG-focused companies have seen not only higher returns but stronger earnings, growth and dividends, according to MSCI.
Decomposition of Returns by ESG Ratings
*Contributions of earnings growth and dividend/buybacks to active returns
**Active return is the additional gain or less compares to its respective benchmark
MSCI ES ratings of companies in the MSCI ACWI Index between May 31, 2013 and Nov 30, 2020
Source: MESCI ESG Research LLC. Dec, 2020
There are concerns about ‘greenwashing’, the practice where companies market themselves as environmentally friendly while not actually taking concrete actions towards the protection of the environment.
A risk alert was issued by the SEC’s Division of Examinations saying the agency found instances of misleading claims as well as inadequate policies, procedures and documentation regarding ESG investing. The agency has ramped up reviews of corporate climate disclosures, formed an enforcement task force on ESG and climate issues, and released a request for public comment on ESG and climate-risk disclosures, among other moves.
In early March, the European Union (EU) Sustainable Finance Disclosure Regulation became effective, which imposes sustainability-related disclosure requirements on financial services institutions such as banks, insurance companies, pension funds, and investment firms.
Tariq Fancy, a former chief investment officer for sustainable investing at BlackRock, says greenhouse investing is headed for massive failure because the entire energy investment system is merely designed for profits and Green investing does little to stop climate change. Fancy argues that investors have a fiduciary duty to maximize returns to their clients, which essentially means that they will continue to invest in activities that contribute to global warming as long as returns there are more favorable. Fancy also argues that in many cases, it’s actually cheaper and easier for a company to market itself as green as opposed to doing the long-tail work of actual sustainability.
Trends and Supporters of ESG Investing
Global ESG assets under management have grown from $4bn in 2015 to $150 billion in 2020.
Global ESG ETF Assets Under Management (AuM)
At the same time, ESG funds (sustainable funds) accounted for about a fourth of the money that flowed into all U.S. stock and bond mutual funds in 2020. The number of sustainable funds available to U.S. investors also grew to almost 400 in 2020 — up 30% from 2019 and a nearly fourfold increase over a decade, according to Morningstar.
Billionaire activist investor Bill Ackman, CEO of the $13 billion hedge fund Pershing Square Capital, also recently promoted the importance of ESG investing. In a shareholder letter, Ackman said sustainability is “fundamentally aligned with running a successful business.”
In January 2021, BlackRock CEO Larry Fink called for corporate climate disclosures while proclaiming that companies must have a purpose beyond profit. JPMorgan made its debut in the green bonds market in September 2020, selling $1 billion in green bonds maturing in four years. Green bonds were created to fund projects that have positive environmental and/or climate benefits.
Environmental, social and governance-based spending is gaining momentum, as companies devote more of their business plans to the concept. Younger investors, like millennials, are increasingly taking sustainability into account as to where to park their cash.
Responsible investing is not just the latest trend. As the industry adapts to the emergence of ESG as a key component influencing investment decisions, asset managers will face the ESG question both for themselves as corporations and in the context of the products they offer. The emerging importance of ESG factors will be an opportunity to increase the impact they have not only on client outcomes but also on the environment and society more broadly.