As 2022 proved, markets can swiftly lose affinity for companies that aren’t profitable and when that happens, investors holdings shares of those money-losing firms usually incur punishment. That’s another way of saying, regardless of the market environment, embracing profitable companies is often a wise idea. As the Invesco ESG Nasdaq 100 ETF (QQMG) proves, investors can do just that while also tapping the benefits of environmental, social, and governance (ESG) investing.
The exchange traded fund follows the Nasdaq-100 ESG Index, which is a collection of large- and mega-cap (mostly) growth stocks, many of which have been pioneers in corporate-level adoption and application of ESG virtues. The long-standing ESG reputations of many QQMG constituents ensure investors get a clean, relevant entry to ESG and one that largely steers clear of greenwashing issues.
The ESG “headstart” sported by some QQMG components is relevant today because ESG is an increasingly prominent phrase of both corporate and stakeholder lexicons.
“Where once the value of an organization was seen as a matter of how well its shareholders performed, there is now a greater emphasis on using environmental, social, and governance (ESG) measures to determine valuation. In fact, the practice of assigning an ESG rating is now standard in many major global markets,” noted Inogen Alliance. “This change has come as investors and business leaders respond to increasing pressure from governments and the public to operate with greater transparency around these three key pillars.”
QQMG is useful on another front in that ESG can potentially help investors identify lower-risk investments. On the surface, that may seem counterintuitive because growth stocks are often as somewhat risky, but in the case of QQMG, ESG can be a risk reducer.
“Rating an investment on historic and projected financial performance is a rather straightforward way to identify investment opportunities. However, finances are only one part of a bigger picture,” added Inogen Alliance.
Regarding profitability, studies indicate ESG-centric firms perform well on this metric. Perhaps it’s not a coincidence that some QQMG member firms aren’t just profitable, but are also among the most cash-rich American companies, confirming the ETF’s quality tilt.
“While it’s clear that there is risk associated with underperforming in each of the three ESG pillars, the correlation between good performance and profitability isn’t initially as clear. But the two are connected,” concluded Inogen. “An aggregated study of the findings from over 1,000 reports authored between 2015 and 2020 found that corporate ESG initiatives were strong drivers of improved financial performance.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
