As the ‘greenest’ stocks rise, some ESG fund managers look elsewhere

For ESG investors who want strong returns, the greenest stocks can become too expensive.

A tidal wave of money has flowed into funds focusing on environmental, social and corporate governance principles in recent years. Assets in such funds hit $ 2.74 trillion by the end of last year, according to Morningstar. But an appetite for green stocks with the best credentials means these stocks now come with a premium. So some fund managers are looking instead to invest in companies that are still working to improve their ESG footprint.

“The traditional gold rush in ESG has been to buy the best companies, the winners, and it worked. But as more and more people chased the same opportunities, the performance became smaller and smaller, ”says Kasper Elmgreen, share manager of the French fund company Amundi.,

which manages EUR 2.064 trillion (USD 2.28 trillion) of assets. “You invest in companies that are already big, so how much bigger can they get?” he asks.

As a result, the efforts of sustainable portfolios to achieve higher returns have led to a new strategy: buying shares in companies that have made progress in one aspect of their ESG profile over time, or that intend to introduce green change. These companies, which fund managers call ESG enhancers, usually have lower ESG ratings than leaders in their sectors. Compared to stocks in the top ESG rated companies, the stocks of the improvements are typically seen not only as undervalued in terms of their ability to earn this ESG trading premium over time, but also as undervalued relative to their standard earning potential because many e.g. . companies are also categorized as value stocks.

The process of identifying ESG enhancers varies widely across investment professionals. One approach involves a mix of fundamental analysis with changes in ESG scores, using internal or third-party providers’ assessments as a starting point. Other ways to spot improvement funds include being aware of management’s commitments to sustainability. Creating the role of a sustainability manager or incorporating ESG metrics into executive pay plans may also suggest that companies are beginning to recognize that sustainability will play a role in their future success.


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“It’s decisions that start at the top, where top management says, ‘We can do better,’ and then it filters down,” says Mr. Elmgreen. He says Amundi has launched seven funds focusing on improvements. The oldest, Amundi Funds European Equity ESG Improvers, has won around 38% since its launch in June 2020 to mid-April. By comparison, the MSCI Europe Index rose around 35% over the same period.

Casey C. Clark, president and chief investment officer of Rockefeller Asset Management, which oversees $ 12.8 billion in assets, says his company conducted an analysis that showed that between 2010 and 2020, shares in companies were across the market value spectrum , which improved their ESG ratings surpassed by almost 4% per year the companies whose results fell. Rockefeller used the results of its analysis to launch the Bloomberg Rockefeller US All Cap Multi-Factor ESG Improvers Index last year.

“If companies are positioning themselves for a sustainable future, you should see an increase in brand value, customer and employee loyalty and additional competitive advantages,” says Mr. Clark.

ESG-enhancing stocks are not traded as high as stocks in companies with high ESG scores, says Zhihan Ma, global head of ESG at brokerage firm Bernstein.

“I think there will be more focus on improvements going forward,” Ms Ma says, “but where it gets a little difficult is: How do we then ensure that these companies actually improve?”

RBC Capital Markets has developed an “ESG Contenders display” with competing stocks that are relatively cheaper and less popular with sustainable investors. Sara Mahaffy, ESG strategist at RBC, says the company’s analysts screen stocks based on criteria, such as how they handle economically significant ESG issues, or whether they develop products or services to help deliver positive social and environmental change. RBC in September added to its ESG Contender list Equinor AS

A, a Norwegian oil and gas company that last year introduced new emission reduction targets.

It is certainly not without challenges to invest in companies with weaker ESG credentials. The general lack of standardized sustainability data, together with large differences in the various ESG assessments available, remains a concern for investors.

Ma says she would like to see more clear evidence that fund managers are investing in companies that are really making an effort and pushing them to change. “We need asset managers to show their progress with each of their improvement candidates over time and have an escalation policy,” says Ms. Must. “There are real improvements and commitment efforts out there, but how we differentiate authentic efforts and greenwashing will be a big focus.”

Ms. Sardon is a Wall Street Journal reporter in Barcelona. She can be contacted at

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