Out of all the results from Nov. 3, environmental, social and governance, or ESG investing, is one of the biggest winners for the markets.
Sure, the U.S. elections for now are setting up to provide limited changes to the hand of government. Up on Capitol Hill, the House stays in current party control, albeit with diminished numbers. The Senate stays in current party control given the current status of results in Alaska — but will remain in jeopardy through runoff elections for two Senate seats in Georgia.
Then down The Hill on Pennsylvania Avenue, it appears that the White House will change party leadership. If the Senate holds, this will limit major legislative actions, including major tax changes. But it does set up for changes in leadership in all Cabinet positions and agencies.
This will result in a series of initiatives, regulatory interpretations and enforcements and mandates either under agency heads or via executive order. And all sorts of things will be changing for ESG. Government contracts, access to Federal land, environmental limitations as well as even ERISA (Employee Retirement Income Security Act of 1974) investment rules for retirement accounts and plenty beyond will be fully supportive for ESG.
ESG stands for environmental, social and governance. And it is a both a category of companies as well as a scoring mechanism of companies. And the basic nature of ESG is that it is a means of investing that will not only provide growth and income – but it will be done in a manner that considers its impact on the environment, a greater positive contribution to society and is managed in a more transparent way that is focused on shareholders as well as other stakeholders.
Environmental means greater use or production of renewable or cleaner energy along with less waste and material use. This is and of itself not a drag on most companies, including energy and utility companies that continue to drive growth and more income from renewable and cleaner energy production.
Social concerns bring in the practices of involving more stakeholders into the decisions of companies. It means that companies are more aware of their impact on communities as well as consumers. It can be a grab bag for lots of other causes, but at its core, social responsibility should result in more favorable views of companies and treatments by governments and customers.
Governance includes better recognition of shareholder’s rights. This means independent boards of directors, more transparency in executive compensation and greater disclosure of company activities and financial conditions. All of this I’ve always been in favor of, including separate CEO and chairman of the board positions, as well as greater disclosure throughout the year and in the quarterly reports of business activities and finances with less reliance on the very small print in the footnotes.
ESG Is Rising in Demand & Performance
Individual investors making direct investments, while rising in importance recently, are still a smaller part of the stock and bond market. Institutional investors continue to dominate in activities and holdings. And while many institutions are run privately for the benefit of their founders, more are run for the benefit of many different cohorts.
Think pension funds or endowments which make up a large portion of the capital markets in the U.S. and beyond. The beneficiaries of these funds are demanding that fund management invest more in ESG-compliant or ESG-focused companies. And historically, beneficiaries have had a large sway on fund management when it comes to several targeted issues or agendas.
This is bringing the concept of ESG further into the boardrooms and C-Suites of companies as well as fund managers directing more capital to ESG companies. And major fund managers are getting onboard.
BlackRock (NYSE:BLK) — in my monthly dividend paying portfolio inside Profitable Investing called the Incredible Dividend Machine — has been making larger investments in 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.
And the ESG market has been showing good performance. The S&P ESG Index has returned 197.95% over the trailing ten years.
And over the past trailing year, the ESG index has outperformed the S&P 500 by 18% in a better total return. This shows that ESG investing can be more defensive or reliable and may well attract more capital for better returns than for the general stock market going forward.
Now, ESG compliance is a squiggly bit of analysis. On my Bloomberg Terminal, there is a function that takes a lot of compiled data and comes up with all sorts of embedded ESG criteria. This means that even a petrol royalty company such as a favored Viper Energy (NASDAQ:VNOM), the landlord of the Permian Basin inside the Total Return Portfolio of my Profitable Investing is not negatively rated overall in its ESG analysis.
So, compliance can be achieved across industries at some level for environmental social or governance. But I want to direct your attention to three companies firmly leading in the ESG green energy space and then direct your attention to three ETFs in the general ESG stock and bond markets that are all great opportunities right now for more green dollars for your portfolio.
ESG Investing for Environmental Growth & Income
I start in the ESG space in the utility market. This is a market where renewable energy is a bigger part of the business for the more successful companies. Government incentives had led many utilities to enter and expand in renewable energy. And state and local governments have been mandating increasing use of renewable energy as a percentage of power generation.
This has led the poster child of the ESG utility market, NextEra Energy (NYSE:NEE) in the Total Return model portfolio of Profitable Investing to really perform. NextEra Energy is one of the largest wind and solar power companies in the U.S. and the world.
It has it deployed in its regulated market in Florida and has expanded around the nation and beyond in its unregulated business. The stock has generated a return since added to the Total Return Portfolio of Profitable Investing of 684.90%, and for the trailing year it has returned 42.57% — which is well above the return of the S&P 500 Index.
Yielding 1.8%, NextEra Energy is an ESG buy in a tax-free account.
Following the playbook of NextEra is Excel Energy (NASDAQ:XEL) in my Incredible Dividend Machine Portfolio. It increasingly is deploying renewable energy generation in its regulated markets and more so for its national unregulated business that serve nearly 4 million customers for electric power.
Over the past five years alone, it has generated a return for shareholders of 141.28%, which is significantly better than the return of the S&P 500 Index. And it continued this year to date with a positive return of 20% that, again, is beating the S&P 500 Index.
Yielding 2.3% with its recently affirmed dividend it is another ESG buy in a tax-free account.
But perhaps one of the best ESG opportunities right now is Hannon Armstrong Sustainable Infrastructure Capital (NYSE:HASI) in my Total Return Portfolio. Hannon Armstrong provides financing for renewable energy and related projects.
It is set up as a REIT, as it complies with the requirement to be associated with real estate as all of its financed projects on the ground. The REIT structure provides for the avoidance of corporate income tax for more cash for dividends. And thanks to the Tax Cuts & Jobs Act of 2017 (TCJA), the dividends come with a 20% deduction at tax time.
But what makes the company even better as a shareholder isn’t just the renewable energy projects, or the tax reductions or the dividend income — but that its financed projects come with government guarantees. This provides a backstop for the company and shareholders which, in the current economy, is all the more attractive.
Since it was added at year end 2019 to the portfolio, it has returned 51.53%. And since the general stock market low in March to date, the shares are really powering up for a very green return of 183.52%.
And with more ESG-seeking investors, I see this company gaining more notice and investment. And it is still a value, as the stock is valued at a mere 3.42 times its intrinsic book value which is still a value for a REIT and more so for a government-guarantee wielding financial. Yielding 2.7% it is a buy in a taxable account.
ESG ETFs – Packaged to Perform in Stock and Bond Markets
Now, if you want to just dip your toe into the cleaner waters of ESG investing – one of the easiest means is to go with a synthetic ETF investment. On the stock front is an ETF put together by Vanguard in its ESG US Stock ETF (CBOE:ESGV). It pays a fee to FTSE (Financial Times and its Stock Exchange USA All Cap Total Return Index) to synthetically track its index of U.S. stocks that have technology as a heavy-weighted segment along with healthcare, financials and other segments.
Since coming to the market in September 2018, it has returned 32.71% which is well ahead of the general S&P 500 Index for the same time period.
Yielding 1.2%, it is a buy as an indexed synthetic ESG stock investment in a tax-free account.
Then in ESG bonds — now more commonly referred to as green bonds — the market is really heating up. There is heavy demand from institutional investors,- with issuers now moving quickly to meet that demand with new offerings.
Green bonds are used to fund ESG initiatives to meet the criteria for buyers and investors. And they come from governments to corporations. This includes the announcement this week by the Chancellor of the Exchequer of Great Britain of the pending green Gilts (U.K. Government bonds) issuance.
There are now a series of ETFs that are working with Bloomberg Barclays bond indexes for the overall U.S. aggregate bond market (all ESG bonds from public sector to corporate) as well as U.S. corporates that are ESG scoring.
BlackRock, as noted earlier, is a big leader in ESG investing. And its iShares ETF unit (acquired some years ago from Barclays) has two leading synthetic investments in the US ESG Aggregate market with its iShares ESG Aware US Aggregate Bond ETF (NYSEARCA:EAGG) and in the U.S. ESG Corporate market with its iShares ESG Aware USD Corporate Bond ETF (NASDAQ:SUSC).
Since coming to the market, both of these ETFs have generated impressive yield and price gains with the Aggregate ETF returning 18.08% and the Corporate ETF returning 23.14%.
With the Aggregate ETF yielding 1.16% and the Corporate ETF yielding 1.86%, they are both buys in tax-free accounts.
On the date of publication, Neil George did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
As the editor of Profitable Investing, Neil George helps long-term investors achieve their growth & income goals with less risk. With 30+ years of experience in the financial markets, Neil recommends undiscovered and underappreciated companies that offer subscribers double-digit yields now and triple-digit returns over time.