Market Impacts

New to Interactive Brokers?

ESG-related issues have impacted different business sectors in more or less dramatic ways, and as governments, companies, and their stakeholders increase their engagement with these concerns, traditional industries seem to be staging significant transformations. Which industry sectors have faced, and continue to experience, material changes? And how have ESG-related concerns influenced the economies in which certain companies operate, as well as their financial performance? These are critical questions when performing your fundamental assessments and require an analysis of massive amounts of variables to factor into your investment decisions. Remember, there are three main umbrella themes that comprise ESG – environmental, social and governance – each of which may have varying degrees of importance when considering a company’s operations, polices, standard business practices, and capital deployment – as well as, ultimately, its financial performance. Under ESG, a company whose revenues rely on cutting down trees to produce wood-based products, or one who produces fossil fuels, for example, will likely face more environmental scrutiny, while healthcare, food manufacturers, and entertainment companies will likely be assessed for their impacts on society. Meanwhile, while corporate-governance policies may be more pervasive across business sectors, they may be better addressed by some more than others.

Forestry and Wood Products

When you think about the kinds of products that come from trees, you may think about firms such as The International Paper Company, or corrugated packaging company WestRock. Besides pulp and paper, wood-based building materials for wood flooring, mobile homes, and wood buildings are all derived from the world’s forests. Protecting forests appears to be key to not only safeguarding biodiversity, but also helping to combat climate change, as well as to secure sustainable water and food supply. The UN’s Food and Agriculture Organization recently estimated that more than 100 million people in the European Union regularly consume forest foods as a nutritional resource, while around 2.4 billion people – in both urban and rural settings – use wood-based energy for cooking. Against this landscape, the global 1t.org project, which aims to grow, restore and conserve one trillion trees also argues that nature-based solutions, including locking-up carbon in the world’s forests, grasslands, and wetlands can provide up to one-third of the emissions reductions required by the Paris Agreement’s 2030 target, adding that the remaining reductions would need to come from the energy, heavy industry, and finance sectors. For their part, companies such as International Paper and WestRock have aligned their strategies to address forest management-related concerns. International Paper, for example, has among its goals to reduce greenhouse gas emissions, improve water quality, and integrate water management into its regular facility assessments, as well as increase its recycling efforts, and its volume of certified fiber. WestRock also appears to be committed to sustainable forestry, including cutting CO₂ emissions, and protecting local and regional water supplies, while making improvements in sustainable packaging, and ensuring its governance policies cover its workforce.

Energy

Besides forestry, renewed attention on the energy sector has generally spurred an uptick of inflows into alternative energy funds, with companies such as Vineyard Wind or NextEra Energy growing their wind or solar power operations. As the attention on greener energies picks up steam, traditional oil and gas companies, such as Exxon Mobil and BP, to name just a couple, have also committed to fighting climate change, as well as aligning their strategies with the UN’s sustainable development goals. Exxon, for example, has been focused on reducing greenhouse gas emissions and improving energy efficiency, including through cogeneration, a process that produces electricity while capturing heat or steam for industrial uses. Among other actions, the firm’s sustainability strategies also include water and plastic waste management, safety, supply chain management, engaging with governments, making community investments, and protecting human rights.

Transportation

Other traditional greenhouse gas producers such as aerospace giant Boeing also targets emissions reductions, as well as workforce diversity and safety, while conventional automakers, such as Volkswagen, for example, are increasingly ramping-up their electric vehicle production and decarbonizing. Meanwhile, electric carmaker Tesla also appears to be further refining its ESG practices, as it contends with reducing or removing cobalt from its lithium-ion battery production due in part to supply chain concerns, which reportedly involve poor environmental and labor conditions. Indeed, transportation infrastructure across the globe appears to be undergoing restructuring, largely in an effort to reduce greenhouse gas emissions, including roads, airports, mass transit, railroads, and waterways, with some corporations and governments using debt-financing to fund their projects. Elsewhere, much of ESG’s influence on certain market sectors seems to stem from shifting consumer behaviors and attitudes, such as for perceived healthier lifestyles or more efficient use of technology.

Food Industry

It has certainly had an effect on the traditional dairy industry, which, at least in the U.S., has been under pressure, as consumer demand for fresh whole milk has largely shifted to plant-based alternatives such as almond, coconut, oat, hemp and soy. The plant-based retail market has been generally reaping the benefits of changing consumer behaviors – contributing in large part to the recent demise of iconic companies such as Dean Foods and Borden Dairy, while dairy farms across the country have been struggling to survive.

Healthcare

Many consumers have also taken their health responsibilities into their own hands, in large part to counter the rising costs of healthcare and health insurance, as well as with an aim to strengthen their immune systems, amid the anxieties spurred by the Covid-19 pandemic.Recent figures from Statista, for example, indicate that revenue from vitamins and minerals in the U.S. has been on the rise, with sales expected to grow at least through 2023. On a related note, the healthcare industry has generally transformed through innovative developments – and disruptions – from technology. Recent advances in telemedical technology, for example, have broadly redefined the sector, enabling a wider spectrum of patients, including the physically disabled, elderly, geographically remote and highly contagious, to exploit the conveniences of personal communications such as email, phone, and video, when seeking medical assistance and sharing files. In fact, the global telemedicine market, including companies like Teladoc Health, is expected to grow at an annual rate of around 19% over a five-year period to 2022, due in large part to a likely rise in telemedicine adoption, as well as increasing cases of chronic diseases, growing geriatric population, government initiatives, and shortage of physicians.

Other Industries

As you can see, these are just some of the ways ESG has helped transform industries, with several other sectors and variables you can also explore, including risks posed by:

• Meat processors,
• Weapons manufacturers,
• Pharmaceutical firms,
• Tobacco companies, and
• Chemical companies, along with
• Several others.

Adding to these, you may also consider how the economic landscape may change as businesses increasingly become disrupted, including how employment, manufacturing, or trade may be affected. There is also a growing number of financial products associated with ESG, including certain exchange-traded funds (ETFs) and debt instruments, which we’ll discuss in our next lesson.