How to find the best ESG stocks without sacrificing returns
I was always skeptical of ESG stocks and socially responsible investing, thinking it was going to hurt my returns. Researching some of these stocks though, I was SOOO wrong.
In fact, one of the ESG companies we’ll look at today has produced a 30% annual return…for 16 years!
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Should You Invest in ESG Stocks?
Now I’ll admit, I avoided the theme for a long time. I invest to make money. I do my part recycling and volunteering but when it comes to my stocks, I’m not trying to save the world.
But all this was based on the idea that putting ESG criteria into your investments, would hurt my returns or limit the stocks I could buy.
And Nation, I’ve got to say, after researching this more…I was surprised how well these ESG companies do and how well a portfolio around the theme can perform.
In fact, I’ll be adding one of these companies to our 2021 Bow Tie Nation portfolio on Stockcard. Look for the link below to follow the portfolio and as a bonus, use the promo code bowtienation for an exclusive 10% off beyond the two week free trial.
What is ESG Investing?
So in this video, I want to do a quick explanation of ESG investing, show you how to look for ESG stocks and why you should care about the theme. We’ll look at data on stock returns for sustainable investing and two ESG funds for broad exposure to the space. Then I’ll reveal five ESG stocks that are not only some of the best sustainable companies but great investments as well.
Now the concept behind ESG investing can be found with religious groups like the Quakers, Muslims and Methodists that set ethical criteria for interest rates and their investments. ESG investing as we know it really came of age over the last couple of decades though. ESG stands for environmental, social and governance to include non-financial factors as part of an investor’s analysis when picking investments.
It’s a way of incorporating your socially responsible beliefs into your investing decisions, really a way of supporting good corporate behavior through your portfolio.
How Does Socially Responsible Investing Work?
There are two ways to take this socially responsible investing idea. One is you can avoid investing in specific businesses or industries. Most commonly, this means avoiding oil companies, casino stocks, alcohol producers and other vice stocks. You might also avoid companies involved in controversies around discrimination or fraud. This is called negative screening.
The other idea is what’s called a positive screen, so investing in companies with a management mission to good environmental, social and governance practices. Here you’re looking for companies with core values around gender or racial diversity, renewable energy, community service and employee wellbeing.
And it’s important to note here that you’re not ignoring good financial analysis in these investments. You’re not saying, well this company has crap-tastic fundamentals but I sure do like the way they recycle.
You’re still looking at the financial ratios and other factors we talk about on the channel, you’re just adding these ESG criteria into your analysis. You’re looking for the best companies that are also socially-responsible.
Are Returns Lower for ESG Stocks?
And despite what many investors might think, I know what I thought before researching this, socially-responsible investing doesn’t have to mean you sacrifice returns. Morningstar grouped all publicly-traded stocks into three categories; Better, Medium and Worse, depending on how well they fit an ESG framework and found no limitation to returns for ESG investors.
In fact, the dividend yield for the Better ESG stocks was actually higher, an average 2.2% yield, versus just 1.3% on the worst socially-responsible picks. Company size, or market cap, tended to be larger for ESG stocks and the monthly return was similar for all three groups.
Best ESG Funds to Buy Now
OK, I know you didn’t come here for the boring part but I wanted to define ESG investing and show you that you don’t have to sacrifice returns. Now the fun part though. Let’s start with two ESG funds for overall exposure to the theme and then I’ll reveal those five ESG stocks to buy.
On that negative screening idea, a good choice is the Vanguard ESG US Stock ETF, ticker ESGV. This fund is going to give you broad exposure to US stocks but it excludes those in those industries like fossil fuels, firearms, tobacco and alcohol. Really it’s a way to get your total stock market exposure but not be supporting these kinds of vice industries or companies involved in controversies.
The fund basically holds the same sector weights as the overall market though its going to be lighter on the energy and utilities side. It holds over 1,400 stocks so pretty much most of the market outside those few industries.
The ESGV pays a 1.2% dividend yield, a little lower than the S&P 500 because it doesn’t include those high yield energy companies, but has returned an annualized 12.5% return since it started trading in 2018.
If you want to go a step further, the iShares ESG USA Leaders ETF, ticker SUSL, adds a positive screen to its stocks.
Not only does the iShares fund exclude those non-ESG industries but it ranks the remaining stocks in each sector by socially responsible criteria. Then it invests in the top half of the list.
The fund holds 286 stocks including the five I’ll highlight below and charges a rock-bottom expense ratio of just 0.10%
Best ESG Stocks to Buy Now
Both these funds will give you broad coverage over ESG stocks but now I want to highlight five stocks to buy for the theme, five companies that are really helping to drive environmental, social and governance changes.
First here is NextEra Energy, ticker NEE, the leader in renewable energy among utility companies.
NextEra is a 55 gigawatt regulated utility in Florida with renewable energy business throughout the U.S. and Canada. It’s the world leader in wind and solar-powered electricity with a 15,000-plus megawatt backlog of renewables projects through 2022.
The company’s ESG creds don’t stop at renewables though. It’s invested over $90 billion back into community infrastructure and lowered customer billing by 30% versus the industry average.
Shares pay a 1.8% dividend yield and the company has grown the payment by an 11.5% annual pace over the past five years.
NextEra recently made an acquisition offer for Duke Energy which would have been the largest utility deal ever. Even though the offer was turned down, NextEra has a great balance sheet and I think uses it to acquire underperforming utilities over the next year, creating really a monster of a company.
Another ESG stock I really like here is Emcor Group, ticker EME, one of the largest construction and facilities services companies in the U.S.
Emcor is kind of a behind the scenes player, it doesn’t get a lot of investor attention, but it’s a leader in most of its business segments in construction and services.
The company is on the forefront of ESG by retrofitting facilities for energy efficiency and green solutions. It’s also consistently among the top companies for ethical management and eliminating pay gaps among employees.
But what really got my attention on shares of Emcor is its performance. The company beat earnings expectations by 62% in the second quarter, proving management can guide the business through the crisis. The stock has produced an unheard of 18% annualized return since 1995, over 25 years, so this one is just a great long-term winner.
In fact, I’m adding Emcor to our 2021 Bow Tie Nation portfolio, a portfolio of companies I think can outperform next year. One of my favorite features on Stockcard is the ability to publish my portfolio here in the Portfolio Store. Follow the portfolio on the site and you’ll get advance notice whenever I buy or sell a stock, even before the video comes out.
It’s free to follow the portfolio but as a bonus, I’ve negotiated a deal for those of you in the Bow Tie Nation. Sign up using the promo code bowtienation, all one word and lower case, and you’ll get an extra 10% off beyond the two-week free trial and other discounts.
Agilent Technologies, ticker A, is a leading life sciences and diagnostics company spun out of Hewlett-Packard in 1999.
Agilent makes chemical analysis tools used mostly in the healthcare diagnostic market but also books about half its sales in other markets including food and the environmental industries. This is a technology-driven company with a competitive advantage in its patents and research.
Agilent ranks top among its peers in nearly every category for ESG investing, from its low carbon footprint for investments in energy efficient technologies, to employee ownership and workplace safety.
The company has increased investment in its sustainable initiatives to $7.4 million in recent years and donated over $9 million to its Agilent Foundation.
Shares are a little pricey here at 48-times on a price-to-earnings basis and the current analyst target is for $93 per share. I would put this one on your radar for any drops in the share price and a strong long-term investment.
Nearly every ESG stocks list includes tech giant Microsof, ticker MSFT and for good reason.
Microsoft was first among its peers to commit to a carbon negative target by 2030 and has created a $1 billion fund to reduce emissions and carbon clearing. The company received the highest ESG rating of AAA last year from MSCI ESG Research.
On the business side, Microsoft recently announced its acquisition of ZeniMax Media, one of the largest game developers and publishers in the world. The deal makes it clear that Microsoft sees its future growth in gaming. The price tag of $7.5 billion was basically nothing for $1.6 trillion Microsoft but makes it a defacto leader in the space.
Beyond gaming, the company has cemented its lead in cloud services and the $10 billion contract from the Pentagon, I think brings in a lot more business from federal and local governments than is baked into the shares at this point.
Sales have grown at a 14% annual pace over the last three years and have even managed to grow this year despite the pandemic.
CEO Marc Benioff has committed Salesforce.com, ticker CRM, as a leader in ESG and it definitely hasn’t hurt the returns.
In the 16 years since shares started trading, the stock has jumped 63-fold for an annualized return of 30% over the period!
The company is a competitor to Microsoft through its enterprise cloud computing service and leads in its ecommerce platform allowing companies to build out their own applications.
Salesforce has committed one million employee hours to the UN Sustainable Development Goals and joined the UN Global Compact, a platform to align companies with responsible business practices. It also operates its own Salesforce Sustainability Cloud to track, analyze and report vital environmental information.
The company blew by expectations last quarter, turning sales growth of 29% into a 114% increase in earnings per share. It more than doubled the analyst estimates for earnings and raised guidance for the year.
You don’t have to sacrifice returns when you invest in ESG stocks. Learn how to find the best stocks for socially responsible investors and enjoy strong returns along with ethical investing.
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