If you’re wondering what ESG investing is, then I have the answer for you. Environmental, social and governance (ESG) investing is a trend that has picked up momentum in recent years. It’s an investing approach centered on building a portfolio of stocks based on how they score based on social responsibility metrics.
This investing style is associated most with the “E” in ESG. That is, the environmental friendliness of a company. Yet ESG covers more than whether a business has a low carbon footprint. The other two letters in this acronym represent other factors that have become increasingly important. Not only with socially conscious investors, but with large institutional investors as well.
So, which stocks have the highest ESG scores?
Before diving into that, let’s take a closer look at ESG and why it has become more popular. Hint: It’s not just because of changing social values. After that, we’ll look at three stocks that rate highly using this criteria.
What Is ESG Investing?
Admittedly, what constitutes ESG investing is a bit of a gray area. In fact, a lack of clear definition on what is an ESG investment and what is not has resulted in one financial institution getting into hot water with German financial regulators. That said, it’s clear what this investing approach is trying to accomplish: Finding the most socially responsible companies to invest in.
Again, ESG doesn’t only focus on social responsibility toward the environment. The “S” in ESG stands for social. This aspect of ESG measures covered a wide swath of factors. These include hot button topics, like diversity and inclusion, and gender equality. It also covers things like fair labor practices, and customer-focused things like data security.
The “G” in ESG stands for governance. This encompasses corporate governance, which covers the actions of a company’s board of directors and senior management. It covers areas like board member diversity, and the political activities of a company and its affiliated officers/directors.
It also covers topics that even investors not too concerned with social responsibility would agree are important issues to care about. For example, executive compensation and director independence.
Why ESG Is Trending
To some, ESG investing may seem like a fad. A way to tie-in personal views on environmental and social matters with one’s portfolio. Yet that’s not the only reason for its appeal. Investors have another motivation with choosing this investing approach.
Namely, that ESG investing not only enables one to align their investments with personal views/morals, but it could also be a rational move when it comes to the bottom line. According to consulting firm McKinsey, ESG-friendly practices can create value in several ways. It can help drive revenue growth and cost reductions. It also can protect a company’s regulatory scrutiny and scandals.
The jury’s still out on whether an ESG approach can outperform the market. Still, the S&P 500 ESG Index has outperformed the regular S&P 500 over the past three years, even with the tech selloff. Many highly rated ESG stocks are tech stocks. Outperformance has played a role in the record inflows into ESG funds during 2021.
The track record of ESG funds and ESG stocks may have you interested in considering this approach. Even if values-based investing isn’t a high priority to you.
ESG: How to Invest
So, how can you start investing with an ESG approach? You could go with an ESG-themed exchange-traded fund. Examples include Vanguard’s ESG US Stock ETF (BATS:ESGV) and the iShares ESG MSCI USA Leaders ETF (NASDAQ:SUSL).
You can also select individual stocks with high ESG ratings. For instance, Microsoft (NASDAQ:MSFT). It ranks No. 1 according to Investors Business Daily, and No. 3 on JUST Capital’s ratings. JUST Capital is a non-profit dedicated to promoting corporate social responsibility.
Salesforce (NYSE:CRM) and Nvidia (NASDAQ:NVDA) also rate highly on both IBD and JUST’s ratings. Nevertheless, don’t think all top ESG stocks are in tech. There are stocks with high ESG ratings across all sectors.
If you are looking to match your portfolio with your values, or are interested in the other form of “green” (long-term profits) that may arise from ESG investing, now may be a great time to start.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.