ESG assets are likely to outperform as the transition towards state capitalism accelerates with little or no resistance. 

State handouts, stimulus checks, which will probably evolve into Universal Basic Income linked to some type of social credit score system, is the new opium of the people. 

Political theorist and social revolutionary Karl Marx wrote in 1843 that “religion is the opium of the people.” But if Marx were alive today, would he think that the Big State has replaced religion.

ESG Assets
S&P 500 returns 2019

ESG assets are likely to outperform as the transition towards state capitalism accelerates with little or no resistance

WEALTH TRAINING COMPANY

We wrote a while back that the offshoring of jobs to low labor cost areas, which is no longer relevant in the age of automation, would result in millions of middle-class people in advanced economies sliding into poverty. What we are seeing is not only declining living standards, when measured in terms of material ownership, but also a tiptoe into totalitarianism. The Big State will provide all your needs, but it also demands total obedience and the masses are marching willingly along.

So why will ESG assets outperform in these dynamics where democracies are morphing into state capitalism and where citizens without reluctance traded their freedom for security?

Environmental, social, and governance (ESG) factors are a set of criteria that can be used to rate companies alongside traditional financial metrics. The rent-seeking class, investors have their place in a state capitalist system, so I doubt that investors are going to be marched off to the Gulag. Yes, there is talk about a billionaire wealth tax and higher corporation taxes but that doesn’t mean that renting-seeking activities will be outlawed. 

Quantitative easing 20 billion per month 2019

“the Big State will provide all your needs, but it also demands total obedience and the masses are marching willingly along”

WEALTH TRAINING COMPANY

What we take state capitalism to mean is that the factors, which determine the success of businesses will not be determined by the typical characteristics of a free-market capitalist system

In other words, the state will decide, which businesses it wants to prosper, succeed and those that they decide to deprive of finance they will let fail. 

So ESG assets will benefit the most from state subsidies

In other words, tomorrow’s winners will not be decided by free-market dynamics, traditional financial metrics, instead it is the state who will decide which companies they want to see succeed and win in a state capitalist system. 

“Mass transportation is being transformed and the trillion-dollar disruptive macro trend to electrify tomorrow’s automobiles represents one of the greatest investment opportunities of the century” – Wealth Training Company

Government policies will provide strong tailwinds which will make ESG assets outperform alternative assets

The G7 end of the fossil fuel era to achieve their mid-century target for emissions to be cut 40-70% globally is fully underway. 

Mass transportation is being transformed and the trillion-dollar disruptive macro trend to electrify tomorrow’s automobiles represents one of the greatest investment opportunities of the century

Nine countries have said they will ban internal combustion engines by the end of the decade. So, it is no surprise that electric vehicles, the likes of Nio (NYSE: NIO) reported that its vehicle sales grew 146% year-over-year to $628.4 million in Q3, 2020. I believe that China’s EV NIO could takeover Tesla sales in China in the not-too-distant future. EV infrastructure, the charging stations are also experiencing a boom, despite the economy being in a depression due to pandemic lockdowns. 

ChargePoint Holdings Inc (NYSE: CHPT) expects a surge in growth as EVs become more widespread “bolstered by policy trends that continued to accelerate the shift to electric in North America and Europe” said CEO Pasquale Romano. Moreover, the digitalization of EVs is also riding a one trillion-dollar macro trend in the auto industry. BlackBerry Ltd (NYSE: BB) provides vehicle cloud security and is working on the next generation of autonomous smart vehicles.

These companies and many like them in the EV space are seeing their stock prices driven by fundamentals, it is no hype their revenue increases are real. 

“MSCI has identified three common motivations for using ESG in one’s portfolio” – Wealth Training Company

So capital flows are expected to accelerate into ESG assets

By the year 2030, it’s expected that a massive 95% of all assets will incorporate ESG factors driven by policymakers. 

In other words, the rotation to ESG assets is likely to be one of the most significant macro trends for investors over the coming decade. A macro trend driven by governance that enforces the ideology of environmentalism, through green policies, could make ESGs the new safe-haven asset.

So how can investors determine whether an ESG asset is a good fit for their portfolio?

MSCI has identified three common motivations for using ESG in one’s portfolio.

The first one being ESG integration, which refers to investors who believe that using ESG can improve their portfolio’s long-term results. One way this can be achieved is by investing in companies that have the strongest environmental, social, and governance practices within their industry. So “ESG leaders” are firm which promote diversity and inclusion, while an ESG laggard could be a company with a history of labor strikes.

The second common motivation factor as to whether an ESG asset fits is whether it incorporates personal values. So, for example,  companies engaged in controversial weapons, tobacco, fossil fuels, and those that are not in compliance with the UN Global Compact would not be defined as being an ESG asset. The UN Global Compact is a corporate sustainability initiative that focuses on issues such as human rights and corruption. 

The third factor determining whether it is an ESG asset is whether the company is making a positive impact. This is also known as impact investing; this practice enables investors to merge financial gains with environmental or social progress.

Investors have a variety of tools to help them in this regard, such as the MSCI Women’s Leadership Index, which tracks companies that exhibit a commitment towards gender diversity. Green bonds, bonds that are issued to raise money for environmental projects, are another option for investors looking to drive positive change.

Investing in ESG assets has a wide appeal, particularly amongst the millennial generation who stand to inherit from their baby boomer parents

A recent 2019 survey found that 84% of U.S. investors want the ability to tailor their investments to their values. Likewise, 86% of them believe that companies with strong ESG practices may be more profitable.

So ESG assets are likely to outperform going forward and should be part of an investment portfolio.

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