Environmental, social and corporate governance (ESG) matters have never been more important to investors and, by extension, the minds leading the economy’s publicly traded corporations. As investors’ attention on ESG stocks has grown, sustainability reporting has become mainstream. ESG measures the collective and sustainability effect of business activities.
Responsible investing using ESG criteria has gained momentum in the last decade. Morningstar™ reported that ESG funds made up one-fourth of the stock and bond flows in the US capital market in 2020.
The market is also growing exponentially, due to investors’ readiness to support sustainable businesses. While the total ESG fund inflow was around $5 billion in 2018, it went up to approximately $51 billion in 2020.
ESG Rating Agencies
Investors are now looking to sensibly invest in entities that manage their impact on the society and environment. To serve this need of investors, ESG rating agencies measure the performance of various entities and compare them through scores and ratings.
ESG reporting and standardization advancements have increased their reliability, which attracts investors looking for evident impact. ESG research companies produce scores for a wide range of areas of influence, providing a clear and useful metric for comparing different investments.
S&P Dow Jones Indices™, Bloomberg™, JUST Capital™, Refinitiv™, and MSCI™ are a few of the most well-known ESG research companies. Scores generally follow a scale: The higher the score, the better a company performs in fulfilling different ESG criteria.
MSCI (Morgan Stanley Capital International), the investment research firm specializing in portfolio analysis, indexes and analytic tools, has set itself up as a frontrunner in ESG ratings. The firm maintains ESG ratings on almost 3,000 companies, and it has established itself as a go-to provider of information for people who hold ESG issues close to their investment processes. MSCI gives 3 separate scores on each parameter to companies and finally gives an overall rating as well. MSCI overall ratings range from an industry leader (AAA, AA), to average (A, BBB, BB) to laggard (B, CCC).
While the specific factors examined vary by company, ESG rating firms mostly review things like corporate sustainability measures, annual reports, employee/resource/financial management, compensation and board structure.
Popular ESG Stocks
Here is a list of companies that have exceptional ESG scores compared to their industry peers:
West Pharmaceutical Services (WST)
Market Capitalization: $24.5B
Dividend Yield: 0.21%
The Pennsylvania-based pharmaceutical company operates as a supplier to major biotechnology and generic drug companies. The company produces elastomer products to store and administer injectable drugs. These include products like plungers, syringes, stoppers, and other devices.
At the ESG front, the company is doing well in aspects related to workplace ethics and diversity, environmental sustainability and affordable healthcare. Their commitment to ESG is largely focused on Diversity and Talent; Compliance and Ethics; Health and Safety; Environmental Sustainability; Philanthropy and Quality.
With the world recovering from a disastrous health crisis, pharmaceutical companies like WST are reliable dividend stock investments for ESG investors.
International Business Machines (IBM)
Market Capitalization: $129B
Dividend Yield: 4.55%
IBM recently reported better than expected results for its first quarter of 2021, thanks to growth in cloud computing and solid contributions from its mainframe business. Moreover, IBM witnessed tremendous growth in 2021 due to the increasing demand for cloud computing and the digitalization of traditional business systems.
IBM has been an industry leader when it comes to ESG rankings for several years now. Its overall AA rating dates back to 2017. Since 2017, the company has maintained this rating, addressing issues such as data security, privacy and cleantech opportunities. These efforts place IBM among the 19% of companies that score an overall AA rating from MSCI from the services, engineering and software sector.
Market Capitalization: $207B
Dividend Yield: N/A
Salesforce is a leading company providing cloud-based digital solutions in the corporate sector. With its reach in multiple sectors, including support, marketing, e-commerce, and sales, the organization represents an earning opportunity worth $62 billion for potential shareholders. With an expected average annual EPS growth rate of more than 25% over the next five years, it’s easy to see why most of the analysts are so bullish on the name.
It gets an overall AA ESG rating from MSCI, because of high marks for human capital development and data and privacy security. It has committed 1 million employee hours to the UN’s Sustainable Development Goals. Salesforce has also joined the UN Global Compact, an event for companies to align with ethical business practices. The company also recently launched Salesforce Sustainability Cloud, a system that helps businesses analyse, track, and report vital environmental information.
These actions can help in the overall reduction of carbon emissions. In 2020, the company launched 1t.org, a step to empower, connect and mobilize the global restoration of 100 million trees.
Market Capitalization: $363B
Dividend Yield: 0.11%
NVIDIA, a well-known company producing video processing cards and graphics, did not get much affected by the pandemic. Despite the significant health crisis closing businesses worldwide, the company managed to double its share value during the last year.
On the ESG front, NVDA is highly rated because of its effective corporate governance and mineral policy. The company uses rare minerals to build its cards and chips; therefore, it has a strict policy against unethical mining and procurement of these minerals.
The company also focuses on the governance aspect as it trains almost each of its supplier/customer/partner-facing workforce for anti-bribery and anti-corruption.
American Express Company (AXP)
Market Capitalization: $125B
Dividend Yield: 1.11%
American Express Company and its subsidiaries provide credit payment card products and travel-related services across the globe. Its services and products include payment and financing products; accounts payable expense management products and services; network services and travel & lifestyle services.
For investors who consider ESG practices in their investment process, they’ll be glad to know that American Express’ rating makes it a frontrunner in the finance industry. Indeed, only 7% of the firms in AXP’s industry received an AA rating.
American Express scores well in human capital development, corporate governance, privacy and data security, and carbon emissions. It gets average marks for consumer financial protection, corporate behaviour, and access to finance.
Home Depot (HD)
Market Capitalization: $340B
Dividend Yield: 2.10%
As the largest home improvement retailer in the US, HD deals in multiple wood-based products. However, the company has a stringent sourcing policy that prevents the purchase of conflict minerals and exploitation of the natural resources of developing nations. Home Depot also plans to reduce its emissions by 40% by this decade and 50% by 2035. Company also targets to help consumers reduce their water consumption by 250 billion gallons.
The ESG aspects where Home Depot does well are its disposal and chemical safety methods, maintaining flawless corporate governance and reducing carbon footprint. On the other hand, areas where the company scores average are data security and raw material sourcing.
HD’s overall AA ESG rating makes it a leader among companies in the retail consumer discretionary industry, per MSCI. They expect HD to generate average annual EPS growth of around 8% over the next three to five years.
NextEra Energy (NEE)
Market Capitalization: $145B
Dividend Yield: 2.07%
NextEra Energy is one of the largest electric companies in the world, working to combat climate change and reduce carbon emissions since the last decade. Compared to other electricity giants in the US, NEE produces 55% less harmful emissions.
NextEra has now set an ambitious goal of reducing CO2 emissions by 67%, till 2025 from its 2005 base levels. This goal essentially means that absolute CO2 emissions would go down by 40% even while NextEra’s energy production is expected to double.
An aspect that makes NextEra a reliable dividend stock investment is its regulated revenue income. NextEra Energy is on the list of Dividend Aristocrats, a group of 65 stocks in the S&P 500 with 25+ consecutive years of dividend growth.
Market Capitalization: $236B
Dividend Yield: 3.10%
As a mega-cap corporation with a current market value around $236 billion, Coca-Cola has partially recovered from the loss in sales due to the COVID-19. Strategists suggest that by providing a dividend yield of 3.1%, Coca-Cola makes the list of the top recovery stocks post pandemic. Nevertheless, if you’re expecting high returns while maintaining an ESG portfolio, Coca-Cola is a good bet. The company has delivered high annual payouts for over 60 years, with an estimated dividend growth of 6.6% in the upcoming years.
Coca-Cola stands out for high scores on waste and packaging materials, safety, and product carbon footprint. Its overall score gets jolted by being a laggard on opportunities like nutrition and health.
Market Capitalization: $154B
Dividend Yield: 1.68%
Honeywell International operates as a diversified manufacturing and technology company worldwide. Honeywell will continue to benefit from its diverse product lines, as well as from its strong presence in the construction and aerospace markets. The company has a history of paying and raising the dividend. The payout has more than doubled since 2014, from 45 cents per share to its current 93 cents.
On the ESG end, HON stands out among other players for its corporate behaviour, MSCI says. It gets average marks for opportunities in cleantech and corporate governance, and is an industry slacker for its labour management practices.
Chr. Hansen (CHR)
Market Capitalization: $72B
Dividend Yield: N/A
Chr. Hansen is a Danish bioscience company that operates in the human nutrition space. It specializes in producing bacteria that increase crop yield, reduce pesticide usage, and curb food wastage. From a sustainability point of view, reducing waste and improving food security are noteworthy milestones. Therefore, the company’s business model is evidently ESG-friendly.
The company has also developed a unique accounting system that measures the impact of its products against the UN’s Sustainable Development Goals. This helps the company to assess the impact of each product and display the scores to people.
Market Capitalization: $97B
Dividend Yield: 5.00%
The UK based pharmaceutical company has some giant ESG initiatives. It has made a total of 13 commitments that contribute to UN Sustainable Development Goals. GSK targets to reduce its negative environmental impact by 25% by the year 2030. Similarly, it is working to reach more than 800 million people with deserved healthcare by 2025.
GSK has taken strict measures to increase female and LGBT representation across its offices in the corporate governance sector.
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If you want to learn about basics of ESG Investing, click here.