ESG investing is a newer concept. At first glance, ESG looks like a stock ticker, but it’s not. In fact, ESG stands for Environmental, Social and Governance. It’s a form of sustainable investing. In the last few years, ESG stocks have been getting a lot of attention and have benefitted from more and more growth. An increasing number of investors are looking at the social and environmental impact of many public companies before buying their stocks. ESG stocks, funds and indexes are on the rise. In this article, we will explore various examples and determine if they are a good investment for the future, both in our pockets and for the world we live in.
What Is ESG Investing?
ESG investing is a relatively new form of investing that is catching the eye of a growing number of investors.
Instead of looking solely at the financial side of a company, ESG also evaluates the benefits a company adds to a society and its impact on the environment.
More factors come into play before investing in a company. Investors can align their values with the operations of a company. Let’s expand on each of the three factors of ESG investing.
ESG Investing: Environmental
First, let’s talk environment. Climate change has been a hot topic for quite some time now. Many companies have business practices that deteriorate the environment around us.
Others, attempt to develop new alternative ways to do their business with little or no impact on the environment.
How many oil spills happened in the last century? They could have all been avoided with enhanced safety protocols and greener ways of obtaining oil.
ESG Investing: Social
Next, the social aspect of ESG investing looks at a company’s impact on its employees and the community in which it operates.
Outsourcing its workforce is a cheap and efficient way to save money and increase productivity.
Very few people in a developed country are ready to work 18 hours per day for less than $1.
In other countries, it is perfectly legal and normal. It may impact the bottom line, but it increases the wealth of its staff.
During the pandemic, Tyson Foods (NYSE: TSN) forced its employees to continue working despite testing positive for COVID. This led to avoidable deaths and work-related health issues.
ESG Investing: Governance
Finally, governance relates to a company’s compliance transparency and truthfulness in its operations as a whole. This final section doesn’t only impact the world, but also shareholders. The business is well-explained and there are very few impactful surprises.
In 2016, Wells Fargo (NYSE: WFC) was in the middle of a scandal led by over 5000 employees and the CEO. Face accounts led to billions of dollars being laundered. Ultimately, this impacted shareholders and Well Fargo customers.
ESG aims to prevent shareholders and consumers from being impacted by unethical corporations.
Steps to Become an ESG Company
Unfortunately, there aren’t any steps or guidelines in place to become an ESG company. Virtually anyone of them can claim this very ”exclusive” membership. It isn’t even necessary to meet all 3 factors.
Only 1 can be enough. We can take the example of any energy company. Although it pollutes the waters and air around us, it is developing and investing in green energies.
Some funds have a significant portion of their investments in companies that have little to do with ESG. But we could see a shift towards ESG investing.
Investing in ESG
How do ESG stocks and funds perform against traditional investments? Some analysts have determined that ESG investing has outperformed many benchmarks in the last decade.
Recently, supply chains have been disrupted which benefitted local products and quicker and greener ways of transporting goods. ESG factors can influence every existing industry.
There is no independent body that ranks ESG companies. Any ranking found online is purely subjective. In the next 2 sections, we will explore them more in-depth.
However, I want to focus on companies that have a real impact in their industry. It isn’t enough for a company to state they are ESG friendly to look good on paper. Specific actions must be taken to be part of the list.
Levi Strauss (NYSE: LEVI)
We begin with a well-known fashion designer that began in 1863. Levi’s jeans and apparel are known for their quality and brand name. In the clothing industry, many chemicals and substances can be toxic to the body or the environment during production or when they are discarded in a landfill.
Levi took a step in the right direction by eliminating the use of these chemicals during production. What about the stock? Analysts are bullish and are expecting growth in the months to come.
Levi’s e-commerce platform and direct-to-consumer are strengthening. Some consumers prefer cheap and one-time clothing from brands like SHEIN or Zara. Others prefer quality and brand strength like Levi’s.
NextEra Energy (NYSE: NEE)
We continue with a utility stock. NextEra is the largest electric utility company by market cap. During the last few decades, it has consistently reduced its CO2 emissions, while energy production continued to increase.
The company’s CO2 emissions are far below the average of other utility companies. NextEra plans to keep decreasing emissions and leading the way in production. S&P issued the best possible ESG ranking to a utility company for its positive actions.
AXA (OTCMKTS: AXAHY)
What is AXA? It is a multinational French insurance, investment and financial company with 100M clients. How did they become ESG? Well, AXA shifted its investments away from coal and high-emission stocks.
The company also offers unique insurance help to help victims of wildfires, floods, storms, droughts and other environmental damages.
Other insurance companies do not offer these services because it is difficult to calculate the risk to reward benefits. AXA is here to help its clients instead of depriving them of a necessary service.
Did I mention that AXA’s dividend yield is 6.86%? I bet you’re even more interested now.
Just like stocks, many funds claim to be ESG-friendly, but are they really? Many of the top ESG stocks invest in tech, energy and other stocks that are harmful. Some even invest in Nestle, one of the biggest polluters and environmentally unfriendly stocks that exist. Which funds and ETFs invest in real ESG stocks?
Nuveen ESG Mid-Cap Growth ETF (BATS: NUMG)
Nuveen isn’t a well-known asset manager. This specific ETF has only about $350M in Assets Under Management (AUM). This is only about 1% compared to its peers. However, Nuveen includes companies that make a difference.
The fund holds only 59 positions and the majority are in tech and healthcare. Its top holdings include Cadence Design Systems (NASDAQ: CDNS), Ulta Beauty (NASDAQ: ULTA), Mettler-Toledo (NYSE: MTD) and other mid-cap lesser-known stocks.
They all have an ESG section on their website highlighting the actions undertaken to make our world a better place.
It’s difficult to find stocks and ETFs that tick more than one ESG criteria. In this article, I tried to bring new investment ideas to the table and stay away from well-known stocks with little ESG merit.
Now You Know What ESG Investing Is
To conclude, ESG investing is a little deceiving. Any company can claim ESG relevance without lifting a finger to do anything about it. Many stocks that truly try to make the world around us a better place fly under the radar for many investors.
They remain focused on the bottom line and financials despite poor ESG ratings. Once we have an unbiased independent body to determine a real ESG score, it will be easier to invest in this field.
Until then, many ETFs and stocks will claim to invest in ESG with little to no evidence. They can nonetheless remain a great investment for our pockets.
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