When the COVID pandemic emerged as a global crisis in February and March, many investors stampeded for the exits and sold off their stocks. But one group kept buying: Investors in funds that specialize in ESG investing, which pick companies based on their records on the environment, social responsibility, and corporate governance.
The panelists on the Fortune Investor Roundtable see that trend not just as a good thing, but as something that could lead to permanent, meaningful changes in how companies operate in the world. At our annual meeting, they talked about hidden “green” companies, the importance of treating employees, and the growing gender diversity in the corner office.
Joining us were Savita Subramanian, head of U.S. equity and quantitative strategy and head of global ESG research at Bank of America Merrill Lynch; Josh Brown, CEO of Ritholtz Wealth Management and author of How I Invest My Money; David Eiswert, head of the top-performing T. Rowe Price Global Stock Fund; Sarah Ketterer, CEO and fundamental portfolio manager of Causeway Capital; and Mallun Yen, founder and general partner of early stage venture capital firm Operator Collective. The following is an edited excerpt from our conversation.
Fortune: The pandemic drew attention to the way companies conducted themselves as corporate citizens. Are investors starting to pay a premium for better behavior?
Savita Subramanian: From February to March, in the fastest bear market we’ve ever had, it was fascinating to see the differentiation of stocks based on some social factors. For example, within sectors, companies with happy employees dramatically outperformed companies with unhappy employees. We also found that companies’ policies around leave were a very important differentiator of returns. We’re all used to thinking about governance risks and financial risks as the big drivers during downturns. But we actually saw these more employee-geared or community-geared factors driving a lot of the returns during that quick but very severe bear market.
Josh Brown: From that severest point through October, sustainable funds and ESG funds took in $30.5 billion in new flows. By the summer, we had taken in more in that category than in all of 2019. And that 2019 number was four times the previous year. A lot of old-school portfolio managers scoff at it. Like, who cares how a company treats its employees? When you talk to investors in their twenties and thirties, they care so much.
Subramanian: And it goes beyond what millennials want. If you’re in an innovative sector that is labor-intensive and your employees are unhappy, they’re going to go to a competitor, and you’re going to lose your advantage.
If you’re in an innovative sector and your employees are unhappy, they’re going to go to a competitor, and you’re going to lose your advantage.
Savita Subramanian, Bank of America Merrill Lynch
What’s also interesting with ESG is that there are opportunities to buy “bad” stocks that have material aspects of their business model aligned with ethical considerations. Energy has been essentially purged from portfolios because of its dirtiness. But if you look at some of these electric-vehicle companies, they use batteries—and mining for the metals that go into batteries is a very dirty business. Whereas some energy stocks could do really well from here on ESG measures because they’ve established carbon neutrality goals.
Brown: We’re gonna get a live test of that, Savita, because Exxon Mobil basically said, “We don’t care about ESG at all.” And Royal Dutch Shell said, “By 2050, we won’t have any oil for sale.” So we’ll see how those two companies fare in the next 10 years.
David Eiswert: I do think there’s a sense that people are more aware today than they were three years ago about social injustice. And I know at T. Rowe Price, we strive to be a leader here. In an industry that’s been dominated by white men as ours has been, the question is, how much talent are we leaving on the table? We want to do things in the interest of our clients, and that means unlocking talent from diverse areas. That’s an alpha-generating issue, right?
I’d be remiss if I didn’t point out that Mallun’s fund, Operator Collective, operates on that principle.
Mallun Yen: At startups it’s very easy to hire people who are just like you. So we’re trying to get to those companies early to hire outside the dominant homogenous group. We invest in founders from all backgrounds, all genders. But because our investor base is 90% women, 40% people of color, when we invest, we are naturally mentoring, helping, and bringing board members and executives from those backgrounds into that ecosystem.
Eiswert: There are just great examples of that this year. Lisa Su at AMD is an amazing leader. She basically is the Intel slayer. It is incredible what she did building that company. Kristin Peck at Zoetis is another great leader. They’re showing by example that they can deliver value.
Sarah Ketterer: Or UPS! [Carol Tomé is CEO.]
Brown: Sonia Syngal at Gap was handed the reins, basically, the day the pandemic started. They were going to spin Old Navy off and have her be the CEO. In March, they said, “Forget it, no spinoff; we’re in trouble. You’re the CEO of Gap now.” And look at the stock chart since then. And I don’t think an elderly white male CEO could do what she now has to do, which is slay Lululemon.
More from the Investor Roundtable
How to play the 2021 recovery, according to investing experts
IPOs, SPACs and direct listings: Silicon Valley opens the doors to more investors
The biggest risks and opportunities for investors in 2021
Royal Dutch Shell (RDS.A)
AMD (AMD)
Zoetis (ZTS)
UPS (UPS)
Gap (GPS)
A version of this article appears in the December 2020/January 2021 issue of Fortune with the headline “Investor Roundtable: The smart money plots its next move.”
