Many people are getting on board with environmental, social and corporate governance (ESG) investing. And some people think that it’s bunk.
For me, it’s not about a political view. It’s about what is working in the stock and bond markets.
I’ve read, listened to and had the tremendous privilege of meeting Dr. Milton Friedman, the Nobel Prize-winning economist from the University of Chicago. He was an ardent supporter of the free market. And while ESG was not yet a common investment phrase, he was critical of companies that took efforts towards causes other than shareholders’ returns.
He thought that by doing this, it made companies less productive and profitable and restricted economic growth. But even Uncle Milty would agree that market forces are justifying investment in ESG today.
ESG is both a category of companies as well as a scoring mechanism of companies. But fundamentally, ESG is a means of investing that will not only provide growth and income but with a better impact on the environment, a greater positive contribution to society and managed in a more transparent way that is focused on shareholders as well as other stakeholders.
Today I want to talk a little bit about how ESG investing has performed for investors before recommending the poster child of the ESG utility market.
ESG Rises in Demand & Performance
Individual investors are still a smaller part of the stock and bond market in their direct investments. Institutional investors continue to dominate. And while many institutions are run privately for the benefit of their founders, others are run for the benefit of many different cohorts. Think pension funds or endowments, which make up a large portion of the capital market in the US and beyond.
The beneficiaries of these funds are demanding that fund managers invest more in ESG-compliant or ESG-focused companies. And historically, beneficiaries have had a large sway on fund management when it comes to targeted issues or agendas.
BlackRock (NYSE:BLK), for example, has been making larger ESG-focused investments. Larry Fink, the founder and CEO of the company, is a big proponent of ESG and has led the asset management company to roll out a series of funds, including a major initiative in its dominating ETF product line up.
The S&P ESG Index has returned over 200% over the trailing 10 years for an average annual equivalent return of around 11%. And over the trailing year, the ESG index has outperformed the S&P 500 by over 18%. This shows that ESG can be more defensive or reliable and may well attract more capital for better returns than the general stock market going forward.
As I said, market forces are justifying ESG investing, and the first pick from this segment of the market is both popular and profitable.
The Perfect Renewable Energy Pick
Renewable energy is a significant part of the business for ESG-friendly utilities. Government incentives led many utilities to enter and expand in renewable energy. And state and local governments have been mandating increased use of renewable energy as a percentage of power generation.
NextEra Energy (NEE) Stock Price — Source: Bloomberg Finance, L.P.
This has led NextEra Energy (NYSE:NEE) to really outperform. NextEra is one of the largest wind and solar power companies in the world. It operates in its regulated market in Florida (utility FPL) and has expanded around the nation and beyond in its unregulated business.
For the trailing year, it has returned 23.5%, which is well above the S&P 500’s return. Yielding around 2%, this stock is definitely a good addition to your portfolio.
Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine…one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.
