[Editor’s note: This story was previously published in January 2019. It has since been updated and republished.]
Environmental, social and governance (ESG) investing continues to gain the interest of investors looking for stocks to buy to produce market-beating results. But are you familiar with the concept of ESG Momentum?
I wasn’t until I saw a recent InvestmentNews article on the subject. It turns out that Truvalue Labs, a San Francisco-based artificial intelligence company, has developed the “Truvalue Platform,” which uses ESG data and analytics to help investors evaluate a stock’s intangibles.
Whatever it takes, remember?
ESG stands for environment, social and governance. There is evidence that evaluating these factors — along with the traditional metrics investors have always used — leads to better performance over time.
Therefore, ESG Momentum rates companies on how much ESG improvement they’ve made from one period to the next. So, you might have an oil and gas company with an ESG Momentum ranking of 85, which demonstrates that even though it might rank poorly in the entire S&P 500 universe regarding its ESG rating, it’s improved recently, compared with its peers.
“Improvements in governance scores are a significant factor in producing superior returns,” Eoin Murray, head of Investment at Hermes, a £30 billion London-based asset manager, said in March 2018. “Investors should always look for evidence of improvement as it is the change in ESG metrics that is the key.”
Also studies suggest that companies with excellent ESG ratings tend to do better in corrections. Given many experts are predicting lower annual returns over the next few years, layering ESG Momentum rankings on top of whatever ESG analytics you use to evaluate stocks could deliver a winning portfolio.
For those who buy the idea that ESG factors do play a role in better stock performance, here are seven stocks to buy from companies winning through ESG.
Stocks to Buy: Berkshire Hathaway (BRK.A, BRK.B)
Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) owns too many companies to list them all in one sitting. Naturally, that makes rating it for ESG factors a complicated task.
“We have a fiduciary obligation to our clients in almost all cases to outperform, and ESG’s most important claim is that doing good will drive better returns. That argument is weakened by inconsistent ratings,” CFA Christopher Merker wrote in July 2018. “As James Mackintosh recently observed, Warren Buffett’s Berkshire Hathaway was ranked dead last in the S&P 500 by one ratings firm and in the middle of the pack by another. That’s too much dispersion.”
He’s not wrong. That’s always been a weakness of ESG methodologies.
However, I managed to find a Truvalue screen from October of the top ten S&P 100 stocks regarding ESG Momentum, and Berkshire Hathaway made the list.
“Berkshire’s short-term Pulse Score hit its highest mark for the past year in May 2018 with the announcement that a Berkshire Hathaway electricity utility serving six Western states won’t build new gas or coal, instead it is planning to add gigawatts of wind and solar capacity,” Truvalue Labs blog stated Oct. 10, 2018.
You don’t have to do much arm twisting to convince me BRK is an excellent stock to buy. The ESG shout out is just icing on the cake.
Stocks to Buy: Costco (COST)
Like Berkshire Hathaway, Costco (NASDAQ:COST) made Truvalue Labs’ list from October 2018. It did so because of several new initiatives including introducing compostable coffee pods in its warehouses, a new policy regarding the use of chemicals, and a commitment to install solar panels at its stores.
Anyone who’s followed the warehouse club for a reasonable amount of time is likely aware of the company’s treatment of its employees. In October, Amazon (NASDAQ:AMZN) announced it was raising its minimum wage for U.S. workers to $15, one dollar more than Costco.
However, the actual wage of the typical Costco employee is more like $22.50 per hour, well above any other retailer operating nationally. And the benefits are better than most.
“The best part is all the perks — guaranteed hours, benefits, time and a half on Sundays, free turkeys at Thanksgiving, four free memberships, a livable wage,” a Costco employee with six years of experience told Business Insider in April 2018.
I shop at Costco a lot and I’ve never seen a grumpy employee. The company takes the “S” in ESG seriously.
Stocks to Buy: Eversource Energy (ES)
When it comes to ESG, Eversource Energy (NYSE:ES) gets a lot of compliments.
In 2016, Eversource’s Massachusetts’ utility was named the most energy-efficient utility provider in the U.S. In 2017, the American Council for an Energy-Efficient Economy (ACEEE) named Eversource the most efficient utility in the U.S. by saving 3% of their annual sales through energy efficiency initiatives. I haven’t heard about its 2018 awards as of yet, but I’m sure they’ll arrive soon enough.
As far as sustainability goes, Eversource also ranks high among its utility peers. No less than five different organizations have rated it anywhere from first to sixth in sustainability among U.S. utilities. If you’re concerned about the sustainability of the utility whose stock you will buy, Eversource is the right one for you.
More importantly, Eversource’s good deeds have resulted in outstanding shareholder returns, Over the last year, Eversource has generated a total return of over 25%,
Stocks to Buy: Keysight Technologies (KEYS)
I had never even heard of Keysight Technologies (NYSE:KEYS) until I saw it on Sustainalytics Research’s list of the 30 Most Sustainable and Ethically Responsible Companies. Eversource is also on the latest ranking.
Not only did the company make Sustainalytics Research’s top 30; it also finished 21st in Just Capital’s 2018 list of America’s most just companies. To rank highly on Just Capital’s list, companies must pay their workers well, be actively studying gender pay gaps, offer flexible work hours, set diversity targets, employ a lot of people, etc.
As for Keysight, it turns out it is the electronics measurement spinoff of Agilent Technologies (NYSE:A). Independent since November 2014, Keysight provides hardware and software solutions for measuring stuff in various industries including automotive, communications, and even the government.
In the four years since going public, KEYS has close to tripled in value.
It’s not easy being a large company with all the different responsibilities involved, but Keysight seems to have figured out how to do it. I’ll be paying more attention to it in the future.
Stocks to Buy: McCormick (MKC)
I wonder if McCormick (NYSE:MKC) is concerned about ESG matters because it owns Billy Bee honey? I’m sure it’s worried about the well-being of bees. However, I only asked that in jest. Dig a little deeper and you’ll find it cares a great deal about sustainability.
In 2018, McCormick was named the 23rd most sustainable company on the Corporate Knights Global 100 Sustainability Index. The index is a group of companies that are leaders in their respective industries from a sustainability perspective. To make the list, a company must have a market cap of at least $2 billion. Each company is ranked for 12 different sustainability indicators.
“This honor validates our efforts to embed sustainability throughout our operations, to provide transparency to our stakeholders and to positively impact communities where we live, source and work,” stated CEO Lawrence Kurzius about the recognition.
In 2017, McCormick committed to improve the world around us, arguing that how it performs as a company is directly related to how it acts as a global citizen. I wonder if President Trump has made the same commitment.
McCormick has set all kinds of goals, both business and community-based, which sets it apart from a lot of big companies. I’ve recommended its stock several times in the past year. Given how much the company cares, I like it even more.
Stocks to Buy: Prologis (PLD)
If you know anyone big in e-commerce, he or she has probably heard about Prologis (NYSE:PLD).
As of the end of the third quarter of 2018, PLD owned or had an interest in 768 million square feet of logistics real estate across 19 different countries, including the U.S. Over the five years that ended in 2018, Prologis generated core FFO growth of 9%, 400 basis points higher than the S&P 500 and 200 basis points higher than REITs as a whole.
Like most ESG-focused companies, sound financials and stock performance are the byproducts of caring about things besides making a buck. As a result, PLD has achieved a lot of firsts in its industry including being the first logistics real estate company to issue green bonds on a global basis.
The company’s sustainability objectives include making its buildings as energy efficient as possible. To that end, 82% of its operating portfolio has efficient lighting with 40% of them operating cool roofs to reduce energy consumption. Perhaps that’s why it’s received 304 sustainable building certifications covering 112 million square feet. And I’m sure there are more on the way.
E-commerce sometimes gets a dirty name for adding to the carbon footprint, but Prologis is doing its part to reverse the tide. That’s great news if you own PLD stock.
Stocks to Buy: Telus (TU)
I couldn’t help but save the best for last. I say this because Telus (NYSE:TU) is based in Vancouver and I’m Canadian. However, on a serious note, as telecom companies go, TU is a good one. It, too, makes Sustainability Analytics’ top 30.
Before getting into the ESG aspects of its business, I’m a fan of Telus stock because it’s one of the few pure-play telecom companies left in North America, devoted entirely to wireless and broadband with no media interests to get in the way and slow profits. Verizon (NYSE:VZ) could take a hint.
Telus has been a big proponent of sustainability for some years. Here’s what one of its CSR analysts said in a 2013 company blog post:
“The true essence of sustainability is to ensure future generations have what they need. Unless we ‘make the sustainability case’ hand in glove with the business case, we can’t truly be sustainable. I’d say that this is key for us to make change beyond our borders,” wrote Dom Repta. “While many people in business truly want to do something, they are challenged to know how to do so when they work within a conventional return on investment model.”
Actions speak louder than words.
In 2018, Telus was named by Montreal-based non-profit The Finance and Sustainability Initiative as having the best sustainability rating in the Canadian technology and communications sector. Companies like Telus are recognized for having weaved ESG into their financial and investment practices.
If you want to own a safe telecom company with an excellent yield to boot, Telus is your play.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.