ESG investing interest 'continues to increase,' Dow CFO explains

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Dire forecasts of the climate crisis, among other social issues, have prompted a growing appetite in investors for environmental, social, and governance (ESG)-focused investments.

Companies, including Dow Inc. (DOW), are getting on board as well.

The chemical company announced its plans on Wednesday to build a zero emissions complex that will use an auto thermal reformer, carbon capture, alternative energy, and offsets to manufacture ethylene, a component in many plastics. 

“Certainly, all the conversations that we have every quarter, the ESG component of it continues to increase,” Dow President and CFO Howard Ungerleider told Yahoo Finance Live (video above).

An environmental oil spill cleanup crew member wears a hot protective suit on a hot day as he walks the beach, loading chunks of oil off the beach from a major oil spill in Huntington Beach Tuesday, Oct. 5, 2021. (Allen J. Schaben / Los Angeles Times via Getty Images)

Some of Dow’s largest long-term investors include Vanguard and BlackRock (BLK), which have been major proponents of ESG. 

“We set the 2050 goal to be carbon neutral across the entire enterprise, and then we set the interim goal to take another 15% of our carbon emissions down by 2030,” Ungerleider said. “That builds on the first 15% reduction we’ve already achieved from 2005 to 2020.”

Ungerleider also stressed that the company’s ESG-aligned targets to cut emissions have not been in opposition to earnings growth: “We’ve been able to do all of that reduction while we’ve also been increasing the earnings power of the company.”

The manufacturing site in Alberta, Canada, that Dow plans to decarbonize. (Photo: Dow)

‘The U.S. is basically flat when it comes to ESG’

Some investors suggest that the ESG framework filters out risk while others seek to maximize value from companies while staying true to social principles. 

In any case, measuring the performance of ESG assets — especially the performance directly attributable to ESG factors — is not as straightforward as it may seem. 

In the U.S., an equally balanced portfolio of 1,000 of the largest stocks with the highest ESG scores (as determined by MSCI ESG overall ratings) outperformed the Russell 1000 benchmark by 40% between November 2012 and May 2021, according to research done by Investment Metrics. 

ESG performance adjusted by sector in the United States. (Source: Investment Metrics)

But when that portfolio was adjusted for sector biases — mainly in tech — that outperformance vanished. 

“Bottom line, the U.S. really doesn’t show any outperformance when you adjust the portfolios to have the same sectors as the benchmarks, any perceived outperformance disappears in the U.S.,” Damian Handzy, the head of research & applied analytics at Investment Metrics, said in an interview on Yahoo Finance Live.

In Europe, however, the research found the opposite was true.

“When you do the same adjustment in Europe, it actually outperforms even more,” Handzy said. “So you’ve got a 10%, 12% outperformance in Europe over the last seven or eight years, and the U.S. is basically flat when it comes to ESG. So bottom line, you’ve made a lot of money investing in high ESG companies in Europe but that hasn’t quite happened in the U.S. yet.”

For the last decade, European markets have led ESG investing, though that may change as U.S.-based sustainable funds gain momentum.

ESG performance adjusted by sector in Europe. (Source: Investment Metrics)

In March, the European Union imposed disclosure requirements known as the Sustainable Finance Disclosure Regulation (SFDR) that compel financial market participants to provide greater information on the sustainability of investments. The primary objective of this regulation is to combat greenwashing in financial products. And, notably, many other countries, including the U.S., are eyeing similar requirements. 

For that reason, the outperformance of ESG investments in Europe over the last decade may be an indication of things to come in the U.S. And, according to Handzy, pension funds, endowments, foundations, and other investors who take a long-term view are already looking ahead to what’s coming in 10 or 20 years.

“We kind of anticipate that if ESG really does take hold in the U.S. the way it has in Europe — you have to remember in Europe it has gone so far as to actually be regulatory required for disclosures of ESG — if we approach that kind of popularity in the U.S., we would anticipate ESG portfolios outperforming kind of on par with what they’ve done in Europe recently,” Handzy said.

Grace is an assistant editor for Yahoo Finance and a UX writer for Yahoo products.

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