ESG Investment: Why Microsoft is Coming into Money
With the market increasing its call for ESG (environmental, social, governance) investment, the creation of ESG focused mutual funds by Canadian banks has ballooned over the past 4 years. The funds aim to respond to the increasing call for ESG investment and could represent the market aiming to capture the positive externalities created by certain companies.
In addition, some large private equity investors have indicated that they will consider more than financial performance (ESG will play a part) in investment decisions. The CEO of Blackrock, Larry Fink, recently highlighted as much in his influential annual letter to investors. Fink emphasized that Blackrock believes “companies perform better when they are deliberate about their role in society,” as well as “a future where every investor — even individual investors — can have the option to participate in the proxy voting process if they choose”. The Chartered Financial Analyst Institute (CFA) also created a chart (see below) surveying investors on the growing impact of ESG factors in investment decisions.
Each of the ESG-focused mutual funds from Canadian banks, (i.e. TD Global Equity Focused Fund—1, RBC Vision Fossil Fuel Free Global Equity Fund, Scotia Low Carbon Global Equity Fund—Series A) have Microsoft as their top holding for 2021. This raises the question, what makes Microsoft stand out from an ESG perspective?
In January of 2020, Microsoft announced that it would promise carbon negativity by 2030. Microsoft also pledged to remove “the equivalent of all the carbon dioxide it’s released since founded in 1975” further appealing to environmental requirements.
Beyond environmental concerns, Microsoft has committed more than $410 million to support ongoing COVID-19 response efforts. In the interest of furthering the fight against racial injustice, it has published a Racial Equity Initiative: Strengthening Our Communities Report, supporting community-based non-profits”. The report lays out measurable goals and details Microsoft’s continued commitment to diversity and inclusion.
It is also working to improve consumer privacy protection, especially in the EU via their CSR Reports Hub, allowing Microsoft to enable its consumers to see what law enforcement sees, human rights efforts, and several other initiatives.
Because Microsoft’s shareholder base is comprised, in part, of institutional investors (69.86%),, it is unlikely that Microsoft is attempting to appeal to a specific set of ESG criteria Since these different mutual funds are supposedly using different criteria to rate companies, it is unlikely that Microsoft is attempting to appeal to a specific set of ESG criteria (or “greenwashing”, defined as attempting to appear eco-friendly and pursue eco-friendly initiatives, without making any tangible environmental changes to operations). Microsoft seems to be making strides to improve their environmental stewardship, social consciousness and governance, without the necessity of external reward. It seems to care about making a difference—notably, by pursuing other projects that aren’t ESG related, but are morally good, nonetheless. For example, Microsoft employees are provided with flexible work schedules, annual bonuses, and according to Comparably.com, Microsoft employees “rate their happiness at the workplace an A+”.
Not only has it reduced its “carbon emissions by 587,000 metric tons” over the past year, but it has also found a way to quantify and publicize its achievements. Contributing to Microsoft’s success in the ESG mutual fund market is its quantification of action. Each section (environmental, social, and governance) of their investments is detailed, with perceived transparency. By quantifying their efforts, investors are better able to track progress towards ESG initiatives and invest accordingly. Further, Microsoft provides consistent quarterly ESG updates, allowing investors to further track progress.
Prior to its ESG commitments, Microsoft stock was already on the rise. Their share price has risen 488.35% over the past 5 years, with many of its ESG initiatives only being announced last year. It is likely that mutual funds are both aiming to price in the positive externalities created by Microsoft and get a positive return on their investments.
Microsoft seems to be the perfect investment for these ESG-focused mutual funds due to its ability to generate positive returns and its strong ESG metrics. Microsoft is coming into money by having strong moral objectives and standards (both ESG related and otherwise).