Value Investing & ESG Can Complement Each Other

Value Investing & ESG Can Complement Each Other

Integrating ESG (environmental, social, and government-mindedness) into value investing could be a vital component in generating returns, contends an article in Investor Daily. While many value stocks can be found in deep in the sectors that aren’t exactly known for their ESG qualifications—such as energy and utilities—associating ESG strictly with green-friendly or growth stocks may be too simplistic of an approach. That’s especially true now that growth stocks have fallen out of favor over the last year.

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But ESG isn’t limited to growth stocks, the article maintains. ESG factors can be incorporated into all manners of investing styles, sectors, and geographies. For example, ESG integration could help managers avoid a value trap—where a low-trading stock drops even further after it’s bought—by examining whether a company is making legitimate efforts to improve their ESG standing, especially companies that have been called out for non-ESG practices and are genuinely trying to change their ways. Being actively involved with the stewardship of ESG—promoting gender equality on boards and ESG initiatives—can also unlock value, particularly in regions where ESG stewardship continues to grow, such as Japan.

More and more companies are beginning to transition to green, and not just renewables and EVs. Utilities, materials, and capital goods are all starting to make the transition, and there is value to be found in those sectors where their price-to-book value is currently on the lower end of their typical range. While that transition plays out, investors can use ESG standards to determine which companies are working to make the transition and may be currently undervalued but whose price will rise as they get closer to green. Likewise, emerging markets, which are usually seen as having lower ESG standards, may actually look to be more valuable upon deeper analysis and engagement, the article posits.

And while value strategies have been less popular than growth strategies over the last decade, value investing is on the rise once more, offering plenty of opportunities in corners of the market to ESG-minded investors.

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