In this piece, we will take a look at the ten best ESG stocks to invest in. If you want to skip the details and head on to the top stocks in this list, then take a look at 5 Best ESG Stocks to Invest In.
Over the past few years, climate change has been a real challenge, especially among young people who perceive the rapidly deteriorating health of the planet as an existential threat to humans. This is the main reason why millennials and Gen-Z are much more conscious about their impact on the planet. The social activism around climate change has forced governments to pass clean energy legislation and pledge to a net-zero future. The impact of this social movement is also very evident in big corporations that now actively talk about their ESG compliance in their annual reports.
Let me first brief you about what ESG actually means. ESG is an abbreviation for Environmental Social and Governance, which refers to a set framework defined to measure the sustainability and social impact of a business. ESG framework lays out some fundamental principles that must be abided by a company in order to achieve ESG compliance. The framework takes into account a number of factors of a business, including its greenhouse gas emission, waste management, and the treatment of employees etc.
Similarly, ESG investing refers to investing in companies that are in compliance with the standards laid out in the ESG framework. According to the managing director of MSGI ESG Research, Remy Briand, ESG Investing is a process which takes into consideration the social, environmental and governance factors alongside the financial factors while making an investment decision. Three things make up the foundation of the ESG strategy: integration, values, and impact, and the approach that the investors choose to take are in line with these objectives. This may include but is not limited to Bottom-up ESG Integration which takes into account the ESG risks and opportunities when carrying out investing analysis, Best-In-Class approach, which picks the companies whose ESG profiles are better than their competitors, and Thematic Investing where social, demographic and industrial trends and structural shifts are recognized, and then investing is done based on the available information.
ESG funds received significant attention from investors as approximately $69 billion was invested into ESG funds in 2021. One method for a socially conscious investor to take exposure to ESG-compliant companies is through ESG ETFs. ESG ETFs provide an easy and simple way of investing in companies that are environmentally and socially responsible. ESG ETFs invest in a basket of stocks especially filtered through a set of environmental, social, and corporate governance (ESG) criteria. One example of a popular ESG ETF is Vanguard ESG U.S. Stock ETF (ESGV) which invests in ESG-compliant companies and excludes companies that do not meet the pre-specified criteria.
Although ESG investing is on the rise, it has also received significant pushback from fund managers who cite the risk of investing in companies while keeping ESG as the primary criterion. ESG funds are at risk of performing poorly, in a study conducted by Researchers at the University of Chicago examined the Morningstar sustainability ratings of over 20,000 mutual funds representing over $8 trillion in investor savings. Although the highest-rated sustainability funds attracted more money than the lowest-rated funds, none of the high-sustainability funds outperformed any of the lowest-rated funds. The result may not be very surprising as many ESG investors do not primarily focus on financial returns and would happily take lower returns for better ESG performance. However, one other contention has been that ESG funds don't deliver on the promise of better ESG performance either.
Researchers at Columbia University and the London School of Economics evaluated the ESG performance of US firms in 147 ESG fund portfolios to the performance of US companies in 2,428 non-ESG portfolios They discovered that firms with ESG portfolios had worse compliance records for both labour and environmental regulations. The study also concluded that adding businesses to ESG portfolios did not increase compliance with labour or environmental rules.
Just like any investment, ESG investing comes with its risks too. However, one thing is evident that ESG investing is on an upward trend which will company in the future. According to Tim Hughes, managing director of financial advisor Wealthspire Advisors, customer interest in ESG investing has been increasing over the previous years.
There could also be opportunities in certain ESG stocks if the market recovers or if the economy doesn't slow as much as expected.
This brings us to the list we have curated on the Best ESG Stocks to Invest In. To create this list, we took the stocks listed in the Vanguard ESG U.S. Stock ETF and ranked them from 10 to 1 based on the number of hedge funds in our database that held shares in the stock in Q2-2022. The % of Holdings indicates the percent each stock accounted for in Vanguard ESG U.S. Stock ETF as of 9/6/2022.
10 Best ESG Stocks to Invest In
10. Salesforce, Inc. (NYSE:CRM)
Number of Hedge Fund Holders: 116
% of Vanguard ESG U.S. Stock ETF Holdings: 0.47%
Salesforce, Inc. (NYSE:CRM) provides enterprise cloud computing solutions offering customer relationship management technology aiming to bridge the gap between companies and customers. Its Customer 360 platform helps the group to deliver a single source of truth, connecting customer data across systems, apps, and devices to help companies sell, service, market, and conduct commerce. It also offers Service Cloud for customer support, Marketing Cloud for digital marketing campaign.
Salesforce, Inc. (NYSE:CRM) delivered a strong financial performance in the previous quarter Q2-FY23, as it reported revenue of $7.7 billion, up 22% year-over-year, and non-GAAP EPS of $1.19. The company has given healthy Q3 guidance as well, with revenues expected to be $7.82 billion to $7.83 billion and non-GAAP EPS of $1.20 to $1.21.
This stock was held by 116 hedge fund holders in our database at the end of Q2-2022 and is therefore included in our list of 10 Best ESG Stocks to Invest In.
9. Apple Inc. (NASDAQ:AAPL)
Number of Hedge Fund Holders: 128
% of Vanguard ESG U.S. Stock ETF Holdings: 7.56%
Headquartered in Cupertino, California, Apple Inc. (NASDAQ:AAPL) produces a broad range of consumer electronic gadgets, such as cellphones (iPhone), tablets (iPad), P.C.s (Mac), smartwatches (Apple Watch), AirPods, and T.V. boxes (Apple T.V.). The iPhone accounts for the vast bulk of Apple's overall income. It ranks ninth on our list of the best ESG stocks to invest in.
Apple Inc. (NASDAQ:AAPL) reported Q2-2022 revenue of $83.0 billion, up 2% year-over-year despite supply constraints. The company reported a normalized EPS of $1.20 for the quarter beating the consensus estimate by $0.04.
Here is what Alger Capital specifically said about Apple Inc. (NASDAQ:AAPL) in its Q2 2022 investor letter:
"Apple Inc. (NASDAQ:AAPL) is a leading technology provider in telecommunications. computing and services. Apple's iOS operating system is the company's unique intellectual property and competitive strength. This software drives extremely tight engagement with consumers and enterprises. The engagement is fostering the growing purchase of high-margin services like music, apps, and apple pay. Apple's shares detracted from performance as management lowered its guidance for the second quarter due to headwinds from the war in Ukraine, adverse foreign currency shifts, and dampened consumer demand associated with the coronavirus in China. Additionally, many investors were concerned that lockdowns implemented to curtail the spread of COVID-19 would impact the production of apple products, however, the manufacturing facilities have resumed activity."
AAPL was held by 128 hedge fund holders in our database at the end Q2-2022. Like Salesforce, Inc. (NYSE:CRM), Uber Technologies, Inc. (NYSE:UBER) , and MasterCard Incorporated (NYSE:M.A.), Apple Inc. (NASDAQ:AAPL) is in our list of 10 Best ESG Stocks To Invest In.
8. Uber Technologies, Inc. (NYSE:UBER)
Number of Hedge Fund Holders: 129
% of Vanguard ESG U.S. Stock ETF Holdings: 0.17%
Uber Technologies, Inc. (NYSE:UBER) is a technology company that connects passengers and drivers, hungry individuals with restaurants and food delivery services, and shippers with carriers. The company ranks 8th on our list of 10 Best ESG Stocks to Invest In.
Uber Technologies, Inc. (NYSE: UBER) reported a solid result for Q2-2022, reporting revenue of $8.07, up 105% year-over-year, and beating market consensus revenue by $700 million. The gross bookings through the platforms reached an all-time high with an annualized run rate of $116 billion.
This stock was held by 129 hedge fund holders in our database at the end Q2-2022 and is therefore included in our list of 10 Best ESG Stocks to Invest In.
7. MasterCard Incorporated (NYSE:MA)
Number of Hedge Fund Holders: 137
% of Vanguard ESG U.S. Stock ETF Holdings: 0.88%
MasterCard Incorporated (NYSE:M.A.) is the world's second-largest payment processor, having handled about $6 trillion in purchasing transactions in 2021. Mastercard is present in over 200 countries and accepts payments in over 150 currencies.
MasterCard Incorporated (NYSE:M.A.) is another company which posted strong results in the previous quarter as it reported revenue of $5.5 billion for Q2-2022, up 21.4% year-over-year, with a Q2 Non-GAAP EPS of $2.56 beating consensus estimates by $0.20. While talking about the financial results, CEO Michael Miebach stated that inflationary pressure has yet to significantly impact the overall consumer spending, which is why the company was able to post a strong result in the quarter.
Here is what Baron Fintech Fund has to say about Mastercard Incorporated (NYSE:M.A.) in its Q2 2022 investor letter:
"The Fund's holdings in the Payments and Information Services themes also contributed to relative performance. Within Payments, lower exposure to this lagging theme and outperformance of Mastercard Incorporated (NYSE: M.A.) added the most value. These global payment networks are viewed as safe havens during market downturns but are also benefiting from resilient payment volumes and a sharp rebound in international travel."
This stock was held by 137 hedge fund holders in our database at the end Q2-2022 and is therefore included in our list of 10 Best ESG Stocks to Invest In.
6. Alphabet Inc. Class C (NASDAQ:GOOG)
Number of Hedge Fund Holders: 153
% of Vanguard ESG U.S. Stock ETF Holdings: 2.07%
Alphabet Inc. (NASDAQ:GOOG) is a holding company, with Google as its wholly owned subsidiary. Google generates 99% of Alphabet's revenue, of which more than 85% is from online ads. The company is in compliance with ESG standards which is why it has managed to rank sixth on our list of 10 Best ESG Stocks to Invest In.
Alphabet Inc. (NASDAQ:GOOG) reported Q2-2022 revenue of $69.7 billion, up 12.6% year-over-year. The company reported EPS of $1.21 for the quarter, missing the consensus estimate by $0.08 due to the slowing macro-environment.
This stock was held by 153 hedge fund holders in our database at the end Q2-2022. Like Salesforce, Inc. (NYSE:CRM), Uber Technologies, Inc. (NYSE:UBER), and MasterCard Incorporated (NYSE:M.A.), Alphabet Inc. (NASDAQ:GOOG) is in our list of 10 Best ESG Stocks To Invest In.
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Disclosure. None. 10 Best ESG Stocks To Invest In is originally published on Insider Monkey.