Invesco senior portfolio manager Randall Dishmon recently discussed the bigger picture when it comes to addressing environmental, social and governance issues. He believes that the best ESG stocks are those that interact with all stakeholders in a genuine and considerate manner.
“ESG has everything to do with how a company interacts with and respects its stakeholders. ESG is integral to good investing,” Dishmon said on July 10, further stating:
“Evaluating ESG is not a separate process – it is inherent in what good investing is all about. The best companies can win without the environment, the communities they serve, and their shareholders having to lose. Those are the investments we look for.”
Dishmon points out that you can have a company with a dual-class share structure that treats all of its stakeholders with respect and consideration. You can also have a company that has a single class of shares but treats its stakeholders poorly.
In his view, the former business is far more likely to be an Invesco investment than the latter.
- Microsoft (NASDAQ:MSFT)
- Salesforce. Com (NASDAQ:CRM)
- McDonald’s (NYSE:MCD)
- BlackRock (NYSE:BLK)
- Zoetis (NYSE:ZTS)
- Deere (NYSE:DE)
- Progressive (NYSE:PGR)
So, which ESG stocks are you excited about? Here are seven that have gotten my attention and should be excellent long-term holds.
ESG Stocks to Buy: Microsoft (MSFT)
There is no question that Microsoft shareholders have benefited dramatically from Chief Executive Officer Satya Nadella’s confident leadership since he became CEO in February 2014. The company’s operating margins have almost doubled in the six years that Nadella’s been in charge of the behemoth tech company.
If you’ve held MSFT stock since the board appointed Nadella CEO on Feb. 4, 2014, and are still holding, you’re sitting on a 450% unrealized profit. As I said at the end of May, Microsoft is a stock you want to own for the long haul.
While it’s been a great ride for shareholders, to be a true ESG stock, it needs to respect the other stakeholders interacting with the company. Does it do that?
Well, according to financial data company EPFR, $2.34 billion in Microsoft stock was held by ESG funds at the end of 2019, the largest weighting of any U.S.-listed company.
“Microsoft says it’s taking a tough line on its environmental footprint. It says it will be ‘carbon negative’ by 2030, and that by 2050 it will have removed all the carbon it has emitted since it was founded in 1975. Last year, Microsoft was included in FTSE Russell’s FTSE4Good Index,” Quartz contributor John Detrixhe reported in February.
“At the same time, Microsoft doesn’t score as highly on gender issues. It wasn’t included on Bloomberg’s gender-equality index. Last year, Quartz reported on an email chain in which dozens of women shared their own frustrations about discrimination and sexual harassment at the company.”
While no company is perfect, Microsoft has a full-time ESG Engagement Director to ensure that Microsoft remains a good corporate citizen, and not just a massive money-maker.
The cloud-based provider of customer relationship management software came into view for me when Salesforce CEO Marc Benioff began to talk about stakeholder capitalism in October 2019. Since then, the chatter’s increased across industries, some for it, some against it.
Last October, Benioff wrote an opinion piece in The New York Times that argued we need a new capitalism. I’ve known for some time that the system of capitalism, as we know it, was and is completely broken, often rewarding those who contribute the least to a business’s success or failure while leaving the rank-and-file employees out in the cold. Covid-19 has been a prime illustration of this.
“In the United States, income inequality has reached its highest level in at least 50 years, with the top 0.1 percent — people like me — owning roughly 20 percent of the wealth while many Americans cannot afford to pay for a $400 emergency. It’s no wonder that support for capitalism has dropped, especially among young people,” Benioff wrote.
Benioff repeated these words while speaking at the World Economic Forum in Davos back in January:
“When we serve all stakeholders, business is the greatest platform for change. And, the great news is, and I believe you can see it here, that stakeholder capitalism is finally hitting a tipping point.”
I sure hope he’s right because the world’s become a tough place to live for a lot of people.
Over the past 15 years, Salesforce has delivered an annualized total return of 26.3%. If you currently own CRM stock, I would not be worried for one second about Benioff’s push to treat all stakeholders with respect and dignity.
That’s because 15 years from now, CRM will be a better company, and your returns will likely be equal to or better than the last 15. Courage doesn’t have to cost you.
Former CEO, Steve Easterbrook, was terminated last November by McDonald’s. He was having a consensual relationship with a company employee. Let go without cause, Easterbrook’s severance package was worth almost $42 million.
That’s a lot of money for someone who was dipping his pen in the company’s ink. Wrong on so many levels, McDonald’s should have fired him with cause, despite the worries of a lengthy lawsuit.
Now, it is McDonald’s that is suing Easterbrook, alleging that he lied to the company about what went on behind closed doors. New evidence has come to light, suggesting that not only did Easterbrook have one inappropriate relationship, he had three others. Further, he’s alleged to have destroyed information revealing his inappropriate behavior.
Also, he is said to have approved a stock grant worth a substantial amount of money for one of the employees he had a sexual relationship with.
“McDonald’s does not tolerate behavior from any employee that does not reflect our values,” Current CEO Chris Kempczinski wrote in a letter to the McDonald’s system about the lawsuit. “These actions reflect a continued demonstration of this commitment.”
So why did I include McDonald’s in a list of ESG stocks?
Because CEO compensation has always been a significant issue for ESG investors, Citywire is a UK-based publisher providing news and analysis for professional investors. In a recent article, contributor Chris Sloley discussed the executive compensation views of Hermes EOS, an ethical investment group (McDonald’s was part of Hermes EOS’s second-quarter public engagement report):
“Other areas in which Hermes EOS opposed plans included McDonald’s, where it disputed the size of the severance package given to former CEO Steve Easterbrook. This report was published prior to the fast food giant seeking legal recourse to reclaim the severance pay following accusations of misconduct.”
Generally, I consider McDonald’s to be an excellent company. I believe that these revelations will move McDonald’s to more closely examine how it compensates its senior executives. And I think that the company will learn from its mistakes.
That’s all excellent news for shareholders.
This isn’t the first time that I’ve included BlackRock in a list of ESG-friendly stocks to own. In October 2019, BlackRock CEO Larry Fink made my list of 10 stocks whose CEOs care about all stakeholders.
But not everyone likes Fink’s take on stakeholder responsibility. His detractors believe it’s not the role of a CEO or a public company to further goals that don’t deliver economic benefit. However, what these detractors miss is that some benefits are intangible and can’t be easily quantified.
At the time, I said that as long as Fink was running BlackRock, I’d be bullish on its future.
Fast forward to 2020. In July, Fink told CNBC that America’s economic recovery depends on the entire country supporting mask-wearing:
“We are witnessing many, many states reopening, but reopening without wearing masks. We need a world of compassion and that compassion [means] wearing a mask. If we all wore masks, if we all cared about our fellow citizens a little more, we will be resolving this crisis much sooner.”
I don’t know about you, but what’s not to like about a CEO who’s logical and caring at the same time. On the same CNBC show, Fink had a lot to say about stakeholder capitalism and Covid-19.
“The one thing that is very clear in this Covid world … [is that] stakeholder capitalism is only going to become more and more important, and the companies that focus on all their stakeholders — their clients, their employees, the society where they work and operate — are going to be the companies that are going to be the winners for the future,” Fink stated.
I couldn’t agree more. It just makes good business sense.
Coincidentally, Hermes EOS, which I mentioned in the McDonald’s section earlier, is majority-owned by Pittsburgh-based Federated Hermes (NYSE:FHI). It published a case study in June about how Zoetis is advancing animal health. Pfizer (NYSE:PFE) spun-off ZTS in January 2013.
Federated Hermes’ Global Equity ESG strategy focuses on companies that manage their ESG risks and whose ESG characteristics are improving. Per a Zoetis case study:
“[O]ur research has found that companies that have managed their ESG risks have historically outperformed over the long-term. We, therefore, seek companies with good or improving ESG characteristics – and the latter has the potential to unlock significant value.”
Zoetis appears to be a company that’s working on improving its ESG characteristics.
“Zoetis scores particularly well from a governance viewpoint. And while the company does lag its peers slightly on environmental and social measures, it should be noted that the company’s sole focus on veterinary medicines presents a distinct risk profile compared to its human-focused pharmaceutical peers,” Federated Hermes writes.
“As such, despite appearing in line with or even lagging peers on individual metrics, overall the company tends to score very highly due to lower ESG risk exposures. It ranks in the top five industry leaders on corruption issues.”
As an animal lover, it’s always nice to see animal-related businesses doing well by doing good. As the report states, Zoetis still has a ways to go before it’s an ESG leader, but it’s making progress, and that’s what matters.
Deere & Company (DE)
According to CSR Hub, John Deere, the world’s largest manufacturer of agricultural equipment, has a CSR/ESG rating of 83, putting it in the top quartile amongst 19,881 companies. And compared to 887 peers in machinery manufacturing, it has a much higher score than the industry average.
In January, I discussed how the company was using artificial intelligence to reduce the amount of liquid herbicide used to improve healthy crop growth. The company first started down the AI road back in 2013, and continues to use innovation to drive its growth.
In the past three months, DE stock has rebounded nicely, generating a 51% total return, significantly higher than its farm and heavy construction peers and more than double the returns of the U.S. markets as a whole.
In the company’s 2019 Sustainability Report, CEO Samuel Allen discussed the company strategy for delivering positive outcomes for all stakeholders:
“At John Deere, sustainability starts with our higher purpose of serving those linked to the land. For nearly two centuries, we have worked side-by-side with our customers to tackle the global challenges of food security and economic empowerment by delivering productivity-enhancing innovations. As the world grows—to an estimated nearly 9.7 billion by 2050—so will these challenges. And so will the opportunities to meet these challenges for which John Deere and our stakeholders are uniquely positioned.”
I continue to believe that Deere holds a vital position in the world of agriculture. As Deere succeeds, I think the world will too. And it starts with a focus on sustainability.
Per its name, Progressive likes to think outside the box. Recently, it announced that it was entering the voluntary benefits market through its partnership with Pets Best, a provider of pet health insurance founded in 2005 by the “father” of pet insurance, Dr. Jack Stephens.
As a result of the announcement, Progressive Pet Insurance by Pets Best will now be available to all U.S. companies interested in adding pet insurance as a voluntary benefit. Pets Best will underwrite and service the insurance.
Progressive has been offering pet health insurance through its partnership with Pets Best since 2009. Americans spend more than $29 billion annually on veterinary care.
“Employees are placing increased importance on work perks that complement their lifestyles and recognize what’s important to them. By offering pet insurance as a voluntary benefit, employers can tap into the strong bond that many people have with their pets,” the company said in its August 12 press release.
What does this have to do with ESG? CEO Tricia Griffith is one of only 30 female chief executives in the S&P 500. With women accounting for just 6% of the index’s CEOs, Progressive is undoubtedly paying attention to both governance and social issues.
Griffith joined the company in 1988, working as a claims representative, rising the corporate ladder until taking the top job in July 2016. In 2018, Griffith was named Fortune’s Businessperson of the Year.
Griffith has spoken about the challenges facing women in the workplace:
“If I could distill everything I’ve learned in my career into one piece of advice, I think for years, especially growing up in the claims organization, I really tried to be one of the guys,” Griffith said in a recent interview with Cleveland.com. “I didn’t want to be seen necessarily as a female, and so that didn’t actually allow me to fully be myself. Probably 15 or 20 years ago, (what helped me was) having people, especially, Glenn (Renwick), who was my predecessor, really sponsored me and said, ‘Try this and do this.’ He always said be yourself.”
In the four years Griffith has held the top job, Progressive hasn’t missed a beat. PGR stock is up 170% in the 48 months since.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.