Finding ESG opportunities in a difficult market

Despite a challenging environment for ESG funds with energy stocks soaring, sustainable investors can still find opportunities with strong returns, CIBC Asset Management’s head of equity research says.

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ESG-focused strategies tend to be underexposed to energy stocks, which have outperformed this year, said CIBC’s Crystal Maloney.

“Being underweight energy led many ESG strategies to underperform broad-based indices due to sector allocation,” she said.

The war in Ukraine and rising inflation have boosted energy and commodities this year. The S&P 500 Energy index was up more than 58% for the year on Monday and the S&P/TSX Capped Energy Index was up 65%, while most broad indexes are down.

The S&P 500 ESG index was down more than 12% for the year.

Still, Maloney said sustainability-focused investors can adopt other strategies to maintain strong returns in this environment.

“We’re seeing many opportunities in the Canadian market,” she said, “and with the volatile market conditions of late that is creating opportunities for stock picking.”

One sector she likes is communications services — in particular Telus Communications Inc., which she considers an ESG leader. The company has detailed carbon and diversity metrics, she said, and it discloses emission reduction targets as well as employees by designated groups.

“We believe that Telus is best positioned for the next two or three years relative to its peers, and to benefit from the improving wireless market, while reducing costs through the transition of 5G and unlimited plans,” she said.

Telus was up more than 6% year to date on Monday.

Vehical parts manufacturer Magna International Inc. is another company Maloney likes due to its focus on  electric vehicles and reducing emissions.

Despite Magna’s recent pullback (it was down more than 20% year to date on Monday) it’s “an ESG leader” with growth potential, Maloney said.

“The market has priced in the near-term slowdown, and the semiconductor supply chain issues that are plaguing the industry will eventually be worked out,” she said.

Maloney also likes Brookfield Renewable Partners, which she called one of the world’s “largest pure-play” renewable investors that’s integral in the climate transition.

“One hundred percent of revenues are sourced from renewable energy,” she said.

“We believe that the current trading price offers an attractive entry point into one of the highest-quality, pure-play renewable names in the Canadian market.”

Maloney also pointed to longer-term returns for sustainable investments as a positive sign. Over the past five years, almost three-quarters (71%) of the Morningstar sustainability indexes have outperformed their traditional market equivalents, she said.

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