ESG investing is a newer concept. At first glance, ESG looks like a stock ticker, but it’s not. 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. As a result, many investors are looking at many public companies‘ social and environmental impacts before buying their stocks. As a result, 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 the world we live in.
Table of Contents
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 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.
1. Environmental - ESG Investing
First, let’s talk environment. Climate change has been a hot topic for quite some time now. But unfortunately, 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 environmental impact.
How many oil spills have happened in the last century? They could have all been avoided with enhanced safety protocols and greener ways of obtaining oil.
2. Social - ESG Investing
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 cheap and efficient to save money and increase productivity.
Very few people in a developed country are ready to work 18 hours daily 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-19. This led to avoidable deaths and work-related health issues.
3. Governance - ESG Investing
Finally, governance relates to a company’s compliance, transparency, and truthfulness. 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. In addition, 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.
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Steps to Become an ESG Company
Unfortunately, no steps or guidelines exist to become an ESG company. Virtually any of them can claim this very ”exclusive” membership. It isn’t even necessary to meet all three factors.
Only one 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 with 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 transport methods. Therefore, 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 two sections, we will explore them more in-depth.
ESG Stocks List
Many ESG investing rankings include multinational giants from various industries, such as Microsoft (NASDAQ: MSFT), Nvidia (NASDAQ: NVDA), Best Buy (NYSE: BBY), and Adobe (NASDAQ: ADBE).
However, I want to focus on companies that have a real impact on 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.
1. 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. Unfortunately, many chemicals and substances in the clothing industry can be toxic to the body or the environment during production or when 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.
2. 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 increasing energy production.
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.
3. AXA (OTCMKTS: AXAHY)
What is AXA? It is a multinational French insurance, investment, and financial company with 100M clients. So 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.
4. 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, most 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 improve our world.
Finding stocks and ETFs that tick more than one ESG criterion is difficult. So, in this article, I tried to bring new investment ideas to the table and avoid well-known stocks with little ESG merit.
ESG Funds
Like stocks, many funds claim to be ESG-friendly, but are they? Many top ESG stocks invest in tech, energy, and other harmful stocks. Some even invest in Nestle, one of the biggest polluters and environmentally unfriendly stocks. So which funds and ETFs invest in real ESG stocks?
Final Thoughts: What Is ESG Investing?
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 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 evidence. However, they can nonetheless remain a great investment for our pockets.
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