The promise of ethical investing
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What if the best companies, judged on a moral level, were also, broadly speaking, the best companies judged by the stock market? The chart above suggests that might actually be the case.
Why it matters: The data suggests that ethical investing can deliver impressive risk-adjusted returns — especially if it takes the form of a long/short strategy that shorts the lowest-ranked companies.
The big picture: Since 2018, Just Capital has been surveying tens of thousands of Americans, asking them what traits they value in a company, and then ranking the biggest U.S. companies by those criteria.
- This isn't an ESG ranking: Combating climate change, for instance, only has a 2.2% weight, while paying workers fairly has a 17.7% weight and treating workers well more broadly carries a 42% weight.
- Interestingly, Americans show very few partisan divisions in the answers to Just Capital's questions — what CEO Martin Whittaker calls "kitchen table" issues like job creation and treating customers fairly turn out to be top of the list of corporate priorities for Republicans and Democrats alike.
Between the lines: While Americans' attitudes shift slowly over time, changes in the rankings are much more likely to be a function of what's happening at the level of individual companies, which can improve their performance on any given metric or at least measure it better and report that performance to investors.
Where it stands: The top-rated companies for 2024 are Hewlett-Packard Enterprise, Bank of America, Accenture, Intel and Citigroup.
- Companies like Marathon Petroleum and Duke Energy are also in the top 10%, so this definitely isn't a green index.
- Just Capital doesn't release a ranking for its bottom-rated companies, but it will tell you if any given company is in its bottom 10% overall.
- Some companies in the bottom 10% include wrestling company TKO, Nexstar Media, Mister Car Wash, Planet Fitness, and both Dollar Tree and Dollar General.
By the numbers: If you invested in the top 94 companies — the top 10% of the 937 companies in the ranking — on an equal-weighted basis, rebalancing every year to reflect the latest scores, you would have increased your money by 131% between the beginning of 2018 and the end of June 2024.
- That's actually slightly higher than the 128% total return of the capitalization-weighted S&P 500 over the same timeframe, which was boosted by the outperformance of megacap technology stocks.
- The bottom 10% of companies, using the same equal-weighting methodology, would have returned just 47%.
How it works: The two strategies both rise and fall in line with the stock market as a whole, which means a long/short strategy — going long the top-rated companies while shorting the bottom-rated companies — should generate attractive risk-adjusted returns.
- Whittaker says that a product along those lines "is very much on the roadmap" and that he's doing his best to make it happen.
- "Companies that treat their workers badly are a slam dunk for a short strategy," he tells Axios.
What they're saying: "We didn't set out to build an investment strategy," Whittaker says.
- That said, he adds, "the investor part of our strategy is important because it's a very powerful demonstrator of the business case for being just."
The bottom line: The investment strategy of "buy the companies you most admire" turns out to have been a very good one.
