In politics, one thing that can typically be counted on is the “swinging of the pendulum,” meaning that the nation’s collective political leanings, priorities, and agendas tend to alternate between extremes every handful of years. We appear to be in the midst of just such a swing with the re-election of Donald Trump as president. After a period of several years characterized by a significant focus on environmental issues, increased corporate responsibility, and implementation of diversity, equity, and inclusion (DEI) policies, we are now experiencing a shift away from many of these efforts. The new Trump administration has moved quickly to distance itself from such initiatives and has encouraged businesses to do the same. This has called into question the viability of one of the most significant investment trends of the past decade: the incorporation of environmental, social, and governance (ESG) factors in selecting investments. The new administration has openly displayed its animus towards clean energy, corporate DEI initiatives, and other environmental or social efforts. So, this begs the question – does it still make sense for investors to consider E, S, and G factors when analyzing investments? Is responsible or sustainable investing a thing of the past – a fad that has run its course? I argue that it’s not and that it can still hold value for investors, but it needs to be done thoughtfully in this new paradigm.
As an investment manager who has incorporated environmental, social, and governance criteria into the investment process for many years, I believe there is a major misconception of exactly what “ESG investing” really is. Let me be clear – it is NOT just about feelings. It isn’t just about trying to “do good” or “make the world better” with total disregard for financial outcomes (though doing good and making the world a better place are certainly goals worth pursuing as part of an investment strategy). On the contrary, analyzing a company’s risks and opportunities related to environmental issues, social trends, and governance practices can have a direct impact on the financial success of the company. In today’s corporate world, businesses face a myriad of regulatory, legal, and reputational challenges related to their operations, and this is especially true for companies in certain industries such as healthcare, banking, energy, and mining (to name a few). Similarly, customer-facing businesses such as those in the information technology and consumer goods industries operate at the whim of ever-changing social trends and priorities. As someone tasked with allocating hard-earned client capital, I believe that ignoring these factors when picking investments seems not just short-sighted but downright negligent.
While I clearly still believe that analyzing ESG factors remains an important and relevant part of the investment process, there is no question that the landscape has changed under this administration. Investors must be cognizant of the fact that the Trump administration, like previous administrations, has the ability to help or hinder certain industries or companies through its trade relations, foreign policy, executive orders, and proposed legislation. President Trump has already shown open hostility toward the solar and wind energy industries, and it has resulted in the downward re-rating of the stocks of solar and wind energy companies. In my view, investors must tread carefully so as to not become a casualty of the administration’s vendettas. We’ve also seen a number of companies that historically embraced environmental and social responsibility quickly adjust their strategies in response to the Trump administration’s push away from such initiatives, wasting no time in dumping emissions goals, DEI programs, and other sustainability-related efforts. But, I think this current political climate may actually create even greater opportunities than we’ve seen in past years for investors who are especially attuned to the environmental, social, and corporate governance issues facing America’s business community. The challenges that companies face in these arenas have not disappeared. The legal and reputational risks that companies must contend with remain as relevant as ever. While Americans may have cast their ballots on the first Tuesday last November, they continue to vote with their wallets every single day. There are and will continue to be opportunities for companies that not only provide valuable products and services but do so with a mindful focus on how they conduct their business. And likely there will be companies that see their share prices decline due to the administration’s policy stance but whose underlying fundamentals remain sound, creating attractive buying opportunities.
The new administration has introduced changes that may contribute to a more dynamic and evolving landscape for investors, and especially for those interested in sustainable, responsible, and impactful businesses. But incorporation of environmental, social, and governance factors remains an important part of a sound investment strategy, and it may even open the door to new investment opportunities for those who are willing to look beyond the headlines.
This article is prepared by Pekin Hardy Strauss, Inc. (“Pekin Hardy,” dba Pekin Hardy Strauss Wealth Management) for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article does not constitute legal, tax, accounting, investment, or other professional advice. The views expressed are those of the author(s) as of the date of publication of this article and are subject to change at any time due to changes in market or economic conditions. Pekin Hardy cannot assure that the strategies discussed herein will outperform any other investment strategy in the future. Investing involves risk, loss of principal is possible. Because the applications of ESG (environmental, social, governance) or Socially Responsible Investing (SRI) screens as part of an impact investing program, certain securities may be eliminated as investments. As such, it may cause performance to behave either positively or negatively compared to strategies that do not apply such screens.
