Avoiding ESG Offenders For These Reasons

There have been numerous research studies and studies on the performance of companies with strong ESG records as compared to those who are 'ESG offenders' that are resulting from the environmental, social, and governance (ESG) investing movement throughout the world.

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In addition, public companies with strong ESG credentials may be able to offer investors a long-term upside prospect whereas public companies with poor credentials can expose investors to undue risk. Also, it is not surprising that stock picking to this effect can be quite challenging, which highlights the advantages of exchange traded funds that incorporate ESG standards, such as the Invesco ESG Nasdaq 100 ETF (QQMG) and the Invesco ESG NASDAQ Next Gen 100 ETF (QQJG).

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The methodology employed by QQMG and QQJG's underlying indexes is not foolproof, but the fact that the indexes are used to create ESG mousetraps, in the case of both QQMG and QQJG, increases the odds the ETFs will be home to multiple ESG offenders, which is a positive for investors.

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According to the report, companies with environmental controversies or accidents suffered the most in the first year of ESG controversies being made public. Companies with governance controversies, however, also tend to underperform for the first year following the disclosure. As Lauren Foster pointed out in Trade Algo, “The median stock has underperformed by 55% compared to the market” following a study by Bernstein, accounting scandals are also damning.

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Historically, energy companies have been some of the biggest ESG offenders. Think oil spills and incidents related to this sector. For this reason, neither QQJG nor QQMG have exposure to the energy industry. Materials stocks account for a small part of the weight of the first, while utilities stocks constitute a smaller portion of the second fund.

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Investing in “ESG improvers” can also lead to positive returns, according to Bernstein research. In March, June, September, and December, investors should take the time to examine additions to the QQJG and QQMG portfolios when the ETFs rebalance. As such, these stocks could eventually serve as important performance drivers for these funds, since some of them were previously offenders but have since become improvers.

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However, identifying new ESG improvement companies is not always easy, and investment professionals have different methods for doing it. rade Algo reports that one way to approach sustainability challenges is to find companies that have credible plans in place to address the issues, such as a company that invests in low-carbon technologies, for example.

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While there are no guarantees QQJG and QQMG will be chock full of ESG improvers, the ETFs remain useful, cost-efficient avenues for avoiding companies that could be vulnerable to ESG controversies.

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Thanks in large part to all the attention heaped upon artificial intelligence (AI) this year, the investment opportunities tied to automation are receiving renewed attention.

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For the uninitiated, there are indelible links between AI and automation, but the latter is older than many market participants realize. It’s also accessible via broad-based exchange traded funds, including the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM).

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The tech-heavy positioning of those products coupled with their large/mega-cap emphasis could be appealing for investors looking to access the automation theme while eschewing stock picking. QQQ and QQQM are appropriate today because automation has far-reaching applications in everyday society.

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“Declines in cost and accelerating developments in technologies that power automation—including the recent breakthroughs in generative AI programs capable of having human-like conversations, creating articles and even editing computer code. Now, after years of saving, many companies are primed to begin deploying capital into these technologies,” noted Vijay Chandar, investment strategist at Morgan Stanley Wealth Management.

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Some investors may be drawn to QQQ and QQQM as avenues to automation investing because of the growth/tech traits offered by these ETFs. That’s an accurate assessment, but automation is supported by much more than just evolving tech demands.

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Consider demographics. Many large developed and some major emerging economies are homes to rapidly aging populations. Those countries also lack the labor force depth need to replace retiring workers on a one-for-one basis. Enter automation as a solution.

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“Aging populations and, in many parts of the world, a shrinking labor supply will have a material impact on the global economy in the coming decades. According to the World Bank, Europe, Japan and China, for instance, are all forecast to see declines in their working-age populations over the next 20 years, and productivity gains will likely be necessary just to keep economic output from declining in these regions,” added Chandar.

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Another reason that QQQ and QQQM are relevant in the AI/automation conversation is because the Invesco ETFs are homes to companies that are integral in driving costs of these technologies lower while enhancing efficiencies.

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“Improvements in computer hardware components such as semiconductors and the development of more advanced software play a big role. In addition, the rise of big data has made it easier and more affordable to ‘train’ AI to properly interpret and process vast troves of information in the complex ways needed to power automation,” concluded Chandar.