As Companies Pivot to ESG, Entrepreneurs Are Ahead of the Curve

Companies that aren’t inherently built on ESG principles are finding that they are having to spend a great deal of capital to conform, whereas their entrepreneurial counterparts that are built from the ground up with ESG values are thriving.

Companies across industries are investing more heavily into eco-conscious business lines. For example, General Motors (GM) and Ford Motors (F) are investing billions of dollars into electric vehicles manufacturing to attempt to meet emissions goals, while energy companies such as Xcel Energy (XEL) and Centerpoint Energy (CNP) have shifted to produce greater amounts of renewable energy.

But these changes come at the cost of precious capital as CFOs shift spending plans by billions of dollars to avoid suffering with credit rating firms.

Companies “are entering unknown territory by allocating funds to projects that carry big price tags, cover long time horizons and yield returns that are sometimes hard to quantify,” executives told the WSJ.

In recent months, credit ratings agencies have either cut or downgraded several companies considered to be risks in an economy transitioning to lower carbon, including major oil-and-gas companies such as Exxon Mobil Corp. and Chevron Corp.

These credit downgrades directly and negatively impact stock prices, as well as increase the company’s borrowing costs.

“In order to be relevant, and be competitive, we need to start investing now,” said Sébastien Martel, CFO of Bombardier Recreational Products Inc, a company that manufactures snowmobiles, boats, and personal watercraft.

“Entrepreneurial firms grow organically, invest in research and development, spread financial success to key constituents, maintain leadership stability, and hold a high ownership stake in their ventures,” said Joel Shulman founder and CIO of ERShares in an article in The Journal of Index Investing.

“They create companies with low environmental imprint, provide social impact in their communities, and reap the booty from exceptional corporate governance,” he added.

Entrepreneurs tend to gravitate to sectors with low environmental impact, with 71% of entrepreneurial companies falling within these low impact sectors. Specifically, they are primarily found within the information technology, healthcare, and consumer discretionary sectors, according to Shulman.

Entrepreneurial companies also create and sustain strong job growth. When comparing companies in the S&P 500 Index between 2012-2017, traditional businesses showed a job growth of only 1.5% over a five-year period, when not factoring in the entrepreneurial counterparts.

Entrepreneurial companies, on the other hand, showed a growth of 20.15% over this same period.

That’s because these companies tend to grow organically, instead of by mergers and acquisitions, a process which tends to see more employees fired and leads to diminished job growth.

CEOs and founders of entrepreneurial companies behave differently in their leadership positions, creating superior governance. “They hold more stock ownership, earn less salary, surround themselves with key stakeholders within and outside of the corporate walls, and are more careful with corporate debt,” said Shulman.

ERShares utilizes the Entrepreneurial Factor©, which combines thematic research and artificial intelligence technology to identify high growth potential entrepreneurial companies to invest in.

The ERShares Entrepreneur ETF (ENTR B+) tracks large cap U.S. companies and contains a sector breakdown that includes 36.07% allocation in information technology, 23.13% in healthcare, and 12.21% in consumer discretionary.

Meanwhile, the ERShares NextGen Entrepreneurs ETF (ERSX B+) tracks primarily small cap, non-U.S. companies and contains a sector breakdown that includes a 27.03% allocation in information technology, 26.38% consumer discretionary, and 16.96% in healthcare.

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