How to Invest in Ethical Stocks

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The Covid-19 pandemic has presented widespread challenges across the world. The emergence of the health crisis saw many financial markets plunge into recession as fear swept across stock markets.

While some commentators were expecting widespread financial turmoil, the markets appeared to have other ideas.

(Image: Statista)

Despite data showing US markets falling by almost 60% in the case of the Dow Jones, stocks were extremely quick to recover, with the Nasdaq doubling its growth between March 2020 and February 2021.

Speaking on the quick recovery of stock markets, Maxim Manturov, Head of Investment Research at Freedom Finance Europe, noted that the early revival was driven by optimism for tech stocks. “When the pandemic started, the market was mostly driven by tech stocks, the so-called stay at home stocks. Currently, when the skies are mostly clear and most economies are winning the battle against the pandemic thanks to the vaccines, many sectors that experienced correction or suffered during the COVID lockdown started recovering,” Manturov explained.

However, as Manturov noted, this tech-based market revival appears to be giving way to more sustainable investment options. According to Yahoo! Finance UK, environmental, social and governance (ESG) investments could be set to double over the course of 2021. Around 12% of UK traders are reportedly set to switch to ESG-based funds.

The data, which has been released by OnePlanetCapital, states that a further 17% of retail investors are set to move their investments over to ESG in 2022 or later as a way of playing their part in making a positive impact on the environment.

70% of investors also said that they’re likely to avoid investing in a business that’s perceived to have a negative environmental, societal or corporate governance impact, whilst 28% would consider creating a riskier investment portfolio if the companies were committed to fighting climate change.

Globally, according to BlackRock’s 2020 Global Sustainable Investing Survey, 54% of investors surveyed consider sustainable investing as fundamental to their investment processes.

The data makes for interesting reading, with clear evidence that ethical stocks are set to become central to the thoughts of investors over the coming months and years. With this in mind, will ethical stocks take over from their tech-based counterparts in driving the stock market’s revival? And how easy is it for investors to identify and buy into ESG stocks?

What Are ESG Stocks?

Firstly, let’s define what environmental, social, and governance stocks actually are. ESG criteria refers to a set of standards for a company’s operations that investors use to screen potential stocks to buy into.

To clarify this, the environmental criteria considers how a company performs in terms of their level of care for the environment. Social criteria refers to how the business manages its relationships with employees, supply chain, consumers and local communities. Governance, on the other hand, deals with a company’s leadership, pay structure, audits, shareholder rights, and internal control.

Sustainability Boosted by the Pandemic

Before the arrival of the Covid-19 pandemic, stakeholder capitalism, the idea that companies shouldn’t be solely focused on generating wealth for shareholders, was already gathering momentum.

The ongoing health crisis appears to have accelerated this trend, with investors rewarding companies that responded to the crisis by prioritizing sustainability ahead of near-term profiteering.

Speaking to CNBC, Jon Hale, Morningstar director of sustainability research, said: “This global pandemic has really put in pretty sharp relief the importance of how corporations treat their stakeholders, in particular their employees and their customers.

So, much of even corporate value these days is based on intangible assets like your reputation. And I think stakeholders will remember how companies either rose to the occasion or failed to rise to the occasion during the pandemic and that will pay off for them down the line.”

(Image: Diversyfund)

Above, we can see an example of how companies with more ethical wage structures have outperformed their competitors that offer less equality in terms of pay. This evidence points to a fundamental shift where the pandemic has challenged investors to stop and rethink where their money is best placed.

Evidence of Investors Waking Up to Ethics

We can potentially point to two 2021 IPOs as evidence of investors waking up to ethical stocks as the market continues to build on its post-pandemic revival.

When Swedish oat milk company, Oatly, debuted on the Nasdaq in May, the environmentally friendly organization’s stock prices experienced a fine first-day pop of 18%, as shares climbed to $22.74 from its IPO pricing of $17.

This favorable first day of trading shows that investors hold favor with Oatly’s pledges to deliver nutritional products while leaving a minimal impact on the environment.

However, such goodwill wasn’t to be found when food delivery giants, Deliveroo, debuted on the London Stock Exchange. Despite the company listing shares at 390p – bottom of its IPO range, prices tumbled to 331p on the first day of trading and wiping almost £1 billion off the company’s £7.6bn valuation.

After the disappointing debut, it became clear that Deliveroo’s investor shortcomings could be largely traced to the company’s shady treatment of employee rights. This points to further evidence that investors are willing to disregard even promising tech-based IPOs should they fail to comply with basic ethical standards.

While tech companies may have played a significant role in restoring investor confidence in stocks in the wake of the pandemic, it appears to be ethical stocks that have taken over the driving seat as the financial revival continues.

In building for a more sustainable future, this could be a trend that carries more than just financial rewards for investors.