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August 5, 2020
  • Our new ESG methodology adopts best practices for measuring sustainability and ethical factors within stocks already screened for their quality.
  • Both India and the U.S. are grappling with uneven manufacturing sector recoveries tied to longer-term trends, as well as the ongoing pandemic.

Because of the stocks’ outsize performance during the coronavirus pandemic, ESG investments are increasingly at the fore. In our last letter to you, we announced that we will be expanding our offerings to include ESG. Financial institutions adopt varying methods for integrating ESG factors into an offering — though baseline standards are emerging, something we took into consideration as we crafted this certificate. 

ESG’s aim is to quantify how companies make money, rather than how much money they make, by analyzing their practices across a range of environmental, social, and governance issues. Exactly which practices are included in that analysis, how they are scored, and how those scores are balanced with more traditional financial analysis, depends on the scoring system used. In its approach to ESG, S.P.H. adopts factors from Sustainalytics, which was recently acquired by Morningstar, and from Robecosam. Both firms have years of experience refining their systems and are considered leaders in the field of sustainability assessments. 

We begin by conducting an initial intensive quality assessment of a company based on profitability, three-year growth history, EBITDA, and other key indicators binded to balance sheet strength. That process generates a quality score for the company. We then analyze that company using the ESG factors from Sustainalytics and Robecosam to create an ESG score. The top performers on both quality and ESG are then considered for inclusion in the certificate, which is launching with 20 stocks across a diverse array of sectors. 

Integrating these factors into portfolio management is intended to better estimate the long-term value of opportunities — and to align investments with investor principles. 

2Q of 2020 marked the most pronounced nosedive for the U.S. in more than 50 years. The 32.9% annualized drop in GDP — far more than the drop tied to the financial crisis — means that if the same economic contraction were to continue, the GDP would be 32.9% less than its current value at the end of 2020. Fortunately, that worst-case scenario is highly unlikely to happen — though high-frequency economic indicators like unemployment reports are gaining unusual importance in reading the tea leaves for 3Q. The euro is now outperforming the dollar, and the U.S. is still struggling to reopen after early efforts by states led to spikes in the spread of the virus.

India’s manufacturing setback

India’s elevated inflation levels, set to continue after the most recent meeting of the Reserve Bank of India, are adding to an uncertain outlook for the country’s manufacturing sector. June’s 47.2 PMI, a significant increase from 27 in April and 31 in May, indicated that India was on its way to reaching pre-pandemic levels by early autumn. Instead, an unexpected drop to 46 in July is raising concerns about a deterioration in business activity that may require more aggressive policy interventions to address.

U.S. remains in the manufacturing doldrums

In the United States, optimism about the marginal but steady recovery of manufacturing activity is tempered by the lack of a proportional growth in jobs. Factory output did not rise as much as expected for July, and with the country still mired in the pandemic, it is unclear when manufacturing employment growth will begin driving these numbers higher.

China’s trade balance for July 2020 will offer insight on whether the country is at risk of stockpiling inventories in the face of decreased consumer spending.

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