The current perceived wisdom of markets is that doing good helps financial performance. Doing good even has its own fancy financial acronym these days – ESG. That covers corporate adherence to Environment, Social and Governance standards. In fact, more than $30 trillion of investment funds are now using ESG metrics/data in their decision making. It would seem the performance debate over ESG is now over which raises an awkward query for this writer. If ESG is a such a big driver of performance why does Europe’s equity markets lag the US so badly?
The data rarely lies. The following chart provides a stark reminder of a European Stoxx50 index going precisely nowhere over the past 5 years while US indices, like the S&P 500 and Nasdaq, roar ahead.
Of course, there are other macro drivers of equity markets. One of the most topical themes these days is the massive underperformance of the value style of investing. Europe is clearly more exposed to more traditional companies and business models and definitely lacks the turbo boost coming from the US technology titans. A $6 trillion boost no less. Yes, the 5 largest tech companies in the US have a market value equivalent to China’s GDP from just a decade ago. And yet, markets are supposed to discount the future. Technology is certainly the future but what about the future US?
Recent headlines from the US do not look out of place in a banana republic with ESG alarm bells ringing very loudly. Check out this medley of mayhem:
Trump demanded 10,000 active-duty troops deploy to streets – CBS News
Justice Department Reversal “Gross Abuse of Power” – New York Times
Revolt of The Generals – Washington Post
Trump Threatens to Invade Seattle – Vice.com
After Facebook staff walkout, Zuckerberg defends no action on Trump – Reuters
The media fixation on the unstable non-genius in the White House almost misses the point. The bigger ESG issue is the passive acceptance by half the legislators in the country(Republican party) of the potential corruption of the DOJ, the military and a massive social media company with a user base twice the size of China’s population. Trump is merely a symptom of decades-long social dysfunction. Yes, George Floyd’s death has forced the national address of systemic racism and a wave of corporate PR statements recognizing the issue and a firm commitment to do good, better. ESG box ticked, move along? Ehhh, not so fast. Where is the corporate concern on the following….
• The US has a prison population of well over 2 million. That is 25% of the global prison population for a country with less than 5% of the planet’s population.
• More than 300 million guns owned in the US.
• Thousands of immigrant children held in cages.
• Toddlers causing death/serious injury with guns annually exceed all Jihadi/Islamic terrorist activity.
• The top 1% of the population in 2018 held over $25 trillion in wealth which exceeded the wealth of the bottom 80%. With 40 million now out of jobs and the Nasdaq hitting all time highs one shudders to think where the current disparity lies.
• 1,000 people are killed by US police annually.
One suspects the most wide-scale street protests seen since 1968 are about far more than George Floyd’s gruesome murder. Europe is not a perfect place but the Covid-19 pandemic has surprisingly revealed a crisis response far more coherent than originally feared. It is early days yet in a hopeful recovery but one wonders if financial markets over time will see Europe through a more atttractive ESG prism. How ironic it would be if European capital markets over the next decade outperform the US due to the comeback of social values rather than financial value…..