Investing with a heart is more than just choosing companies that make you feel good. Studies show that choosing investments based on environmental, social and governance (ESG) criteria can actually give your portfolio a lift. That’s why ESG stocks are gaining in popularity.
Morningstar has at least 56 separate indexes that use ESG criteria to choose stocks and weight funds. According to the company’s study, 73% of Morningstar’s ESG indexes outperformed their non-ESG equivalent funds since inception.
One reason is that companies that follow ESG principles have better management – they tend to have less volatility and have healthier balance sheets.
“The persistent relationship between ESG and these factors should put doubters on notice,” Dan Lefkovitz, a Morningstar analyst, wrote. “Sustainable investing is not just about values.”
Here are three popular companies that are classic examples of ESG stocks:
ESG Stocks to Buy: Microsoft (MSFT)
Microsoft set its sights on being an ESG leader ever since Satya Nadella became CEO in 2014 and pledged to use the company’s resources to change the world for the better.
Microsoft publishes a detailed corporate responsibility report each year in which it takes a critical look at its efforts for global outreach. The report uses Global Reporting Initiative sustainability reporting standards.
The company is the No. 2 purchaser of green power in the U.S., according to the Environmental Protection Agency, and the company is 100% powered by renewable energy.
Microsoft also treats its employees well, which is an important factor in ESG investing. The company ranked No. 34 on Glassdoor’s 2019 listing of the best places to work. More than 80% of employees reported having a positive outlook for the company.
So far this year, MSFT stock is up more than 30% as it’s computing and cloud segments have been in high demand during the novel coronavirus work-from-home requirements.
One thing to note – if you decide to buy one of those many ESG funds, you’ll probably find Microsoft as one of the key holdings. According to Barron’s, almost all of the top U.S.-based ESG funds have MSFT stock overweight.
Chip maker Nvidia gets high marks as an ESG stock based largely on its focus on treating employees well by focusing on key employee benefits and career development.
Nvidia’s vice president of human resources, Beau Davidson, said the focus is keeping employees happy so they stay at the company for a long time. If employees churn through quickly, hopping from one job to another, development slows down.
Nvidia also has employee-resource groups that represent women, people with disabilities, LGBTQ employees and others – that meet quarterly with CEO Jensen Huang.
Turnover at Nvidia is less than 6%, which is about half of what the typical tech company would see.
In the company’s annual social responsibility report, Huang speaks about the company’s people-centric focus:
“The people of NVIDIA also share a commitment to improving our local communities. We balance our near-term business goals with long-term commitments to improving lives, protecting our environment, and creating a workplace where bright minds of all cultures can build their families and do their life’s work. Making a positive impact on the world is the highest purpose a company can have. We’re honored that we can help create a better future for generations to come.”
NVDA stock is up 78% on a year-to-date basis. It also gets a top AAA score from MSCI’s ESG ratings.
As more companies embrace ESG principles – and realize that it has a direct impact on the bottom line and investor interest – you can expect even consumer staple stocks to jump on the ESG bandwagon.
And while you may not think about Pepsi and its assortment of carbonated beverages and snack foods as and ESG stock, the company is making legitimate steps to make the world around it a better place.
Cowen analyst Vivien Azer says Pepsi’s Performance with Purpose program makes it a standout among ESG stocks.
“PEP has continuously taken steps to lessen its environmental impact from rolling out its first all-electric delivery trucks in 2010 to establishing its first compressed natural gas fueling station in 2013. Currently, PEP aims to source 100% of its direct farmer sourced agricultural inputs from sustainable farming in 2020 (vs. 51% in 2018).”
Pepsi has announced plans to have recycled content make up 25% of its plastic packaging by 2025. Its sustainable farming program is among several programs designed to help reduce the company’s footprint.
PEP stock is relatively flat on a year-to-date basis but is up 15% since mid-March.
Patrick Sanders is a freelance writer and editor in Maryland, and from 2015 to 2019 was head of the investment advice section at U.S. News & World Report. Follow him on Twitter at @1patricksanders. As of this writing, he did not hold a position in any of the aforementioned securities.