Interest is growing in value strategies today, because value stocks may outperform during periods of rising inflation. As you assess the choices in this category, it’s important to know that investors don’t have to sacrifice environmental, social and governance goals. In fact, ESG research may strengthen a value portfolio.
What Is “Clean” Value Investing?
“Clean” value strategies avoid companies that are:
- High carbon emitters, such as fossil fuel companies
- Controversial, including those that provide perennially poor customer service or treat their workers poorly
- Engaged in generating revenue from harmful products, such as tobacco
Choosing positive ESG performers and bypassing controversial companies that are highly exposed to regulatory and litigation risk can help steer a portfolio away from bad investments. In addition, a company under consideration must execute well. Its fundamentals and management expertise must be robust enough to create future growth and increase the stock’s value.
Avoiding Value Traps
Value traps are companies that may appear to be buying opportunities because they are trading at low prices, but in fact have very little potential for future growth. Naturally, value investors are looking for low-priced investments; however, if the company is cheap because it is “dirty” or faces ongoing controversies, odds are high that it is a value trap. On the other hand, a positive ESG performer that is attractively priced could be positioned to perform well.
To illustrate, a well-known financial services company that is known for poor workplace practices has repeatedly faced governmental scrutiny. This company's low price does not make it an attractive investment due to the material risk it faces.
An ESG value investor might instead choose a company like Charles Schwab (SCHW). Schwab is widely recognized for its strong workplace practices, including attractive pay and benefits and a one-month sabbatical every five years. Schwab also offers numerous programs for employee development. Because it is a strong performer, it is less likely to experience workplace controversies that negatively impact its stock performance.
Going the extra mile to assess whether a stock offers favorable future prospects at a good value, while avoiding material ESG risks, is well worth the effort.
For the current holdings of the the Parnassus Core Equity Fund, the Parnassus Endeavor Fund, the Parnassus Mid Cap Fund, the Parnassus Mid Cap Growth Fund and the Parnassus Fixed Income Fund please visit the fund’s individual holdings web page. Current and future portfolio holdings are subject to change.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE GUIDELINES The Fund evaluates financially material ESG factors as part of the investment decision-making process, considering a range of impacts they may have on future revenues, expenses, assets, liabilities and overall risk. The Fund also utilizes active ownership to encourage more sustainable business policies and practices and greater ESG transparency. Active ownership strategies include proxy voting, dialogue with company management and sponsorship of shareholder resolutions, and public policy advocacy. There is no guarantee that the ESG strategy will be successful.
The views expressed are subject to change at any time in response to changing circumstances in the markets and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or the Parnassus Funds.
Mutual fund investing involves risk, and loss of principal is possible. There are no guarantees any investment strategy, including a socially responsible (ESG) investment strategy, will be successful in any market environment.
The Parnassus Funds are underwritten and distributed by Parnassus Funds Distributor, LLC.
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Before investing, an investor should carefully consider the investment objectives, risks, charges and expenses of the Funds and should carefully read the prospectus or summary prospectus, which contains this information. A prospectus or summary prospectus can be obtained on the website, www.parnassus.com, or by calling (800) 999-3505.