Today’s investors are often as concerned about a company’s ethics as their bottom line. Environmental, social governance (ESG) standards are transforming the face of corporate America, as many shareholders celebrate a company’s commitment to responsible management.
But what are ESG stocks? Why should you consider investing in them? In this article, we’ll take a closer look at ESG stocks, diving into some of the best ESG stocks of 2021.
What Are ESG Stocks?
What is an ESG stock? ESG stocks represent companies that have committed to adhering to environmental social governance (ESG) criteria. When you invest in an ESG stock, you can be confident that the company has committed to at least one of the following:
- Environmental sustainability
- Equitable treatment of employees
- Ethical leadership practices
While business ethics have long been a priority for many companies, these specific criteria became codified in 2005 and have continued to evolve through the present day.
How Do You Evaluate an ESG Stock?
ESG stocks should be evaluated on two levels:
- Financial performance
- ESG performance
A company’s financial performance can be evaluated like any other stock pick (i.e., looking at past performance, evaluating risk, etc.). But how do you evaluate a company’s adherence to ESG goals?
There are several ways to do it, which include:
- A company’s self-disclosure of goals
- The Morgan Stanley Capital International (MSCI) rating
- Sustainalytics ESG rating
Of course, ratings alone won’t necessarily tell you everything you want to know about investing in an ESG stock. If you choose to invest in a company that shares your passion for a particular cause (or a company whose charitable work impacts your local community), you may need to research the company more directly and balance the information given from third-party sources.
The Best ESG Stocks of 2021
Looking for today’s top ESG stocks? The following list represents the best ESG stocks of 2021, which we’ve arranged in order of their MSCI rating.
Microsoft is one of only two companies on the Dow to receive a perfect MSCI rating (AAA), a feat they’ve maintained since 2017. That makes this tech giant one of the best ESG stocks available today.
Microsoft particularly shines in the “governance” area of ESG, particularly for the way they handle corporate governance, privacy, data security, and clean tech.
However, the company has still been outperformed by other companies for their corporate behavior, and their scores for human capital development and carbon emissions have been average.
Despite these stray marks, the company’s reputation remains stellar, and the ascendancy of cloud-based technology such as Office 365 has only increased their momentum.
Now that business is increasingly going digital, these types of productivity and business tools will prove indispensable, making Microsoft a solid investment for the future.
3M is the other Dow company to receive a perfect rating (AAA) from the MSCI. The company can boast of a strong history when it comes to corporate governance, the handling of toxic emissions and waste, and pursuing opportunities in clean tech.
Corporate leadership practices are ranked as average for the industry, though MSCI doesn’t indicate that 3M falls behind any of its peers.
Most recently, 3M has promised to invest $1 billion for new eco-friendly initiatives, though some past controversies over defective earplugs and the regulation of polyfluoroalkyl substances have led to some uncertainty about the company’s overall future.
In short, 3M is a company with a solid track record when it comes to ESG issues, but current uncertainties might give investors reason to pause. The new clean water and climate pledges may eliminate some of these uncertainties, making this a stock to keep an eye on in the immediate future.
Salesforce.com had previously boasted of a AAA rating from MSCI, owing to their commitment to human capital development, as well as privacy and data security. Unfortunately, the company was downgraded to an AA rating in November of 2020. It’s quite possible that the company may learn from these issues and rebound.
Of course, that’s not to say that an AA rating is anything to sneer at. It makes Salesforce.com a solid competitor with industry giants like IBM. The fact that Salesforce.com is relatively new gives them room for continued improvements.
Salesforce.com focuses on tech-based solutions for the workplace, which could prove to be a gold mine now that more workplaces are going virtual. The company’s recent acquisition of Slack could only strengthen its position as one of today’s top tech companies. If they were to expand beyond their core services, they could easily rise to become a major industry competitor alongside giants like Microsoft.
American Express (AXP)
With an AA rating from MSCI, American Express has demonstrated a solid commitment to ESG criteria, particularly when it comes to human governance, human capital development, data security, privacy issues, and carbon emissions.
While its performance is average when it comes to corporate behavior and consumer financial protection, there are no issues that would make the company fall behind its competitors.
The resilience of American Express is the thing that could potentially make this one of the top ESG stocks on the market today.
Why only “potentially”? There’s some debate as to how rapidly the travel and entertainment industries will rebound as restrictions lift from the 2020 pandemic.
On the one hand, with more people traveling and spending money on dining and entertainment, American Express could see their stock value rise. But without such a rebound, it’s not clear whether this stock will see substantial growth, at least not in the short-term.
Coca-Cola also receives an AA rating from the MSCI, owing to the company’s emphasis on handling packaging materials and waste, as well as its carbon footprint. They also have a strong commitment to employee safety, though the company isn’t exactly known for promoting health and nutrition.
With pandemic restrictions lifting, it’s likely that we’ll continue to see the company’s stock continue to rise. With bars, restaurants, and other entertainment venues reopening, Coca-Cola may prove to be a strong recovery stock.
The degree of this success will depend on the timeline at which the nation fully reopens, but given the fact that Coca-Cola has become a regular consumer staple, it can likely be counted on as a strong performer.
Home Depot (HD)
Home Depot has a solid MSCI rating of AA, with praise due to the company’s attention to chemical safety, the carbon footprint of its products, and its corporate governance.
While this home improvement chain received only average marks in the areas of labor relations, raw material sourcing, and privacy and data security, MSCI notes that the company did not fall behind in any single ESG area.
What makes Home Depot one of today’s top ESG companies? In addition to the criteria above, Home Depot has shown considerable resilience in the COVID economy.
With Americans confined to their homes, home improvement projects have been booming, despite concerns over the cost of supplies. You might expect these trends to continue as the nation recovers, and with more workers opting to telecommute, these consumer trends might also lead to an increase in DIY projects across the board, too.
International Business Machines (IBM)
IBM has enjoyed an AA rating from MSCI since 2017. Their principal initiatives have been in the areas of clean tech and data security, though they have room to grow when it comes to corporate behavior, according to MSCI.
IBM has long been a household name, but there have been recent reasons to consider this company to be a strong investment for 2021.
The company has recently experienced an expansion in cloud computing and computer mainframes, which has given the already massive business a bit more momentum in the tech sector.
Now that the pandemic has destabilized the way that people do business, these types of innovations can catapult tech companies into higher levels of success to the benefit of their shareholders.
In the last year, Amgen replaced Pfizer in the Dow, and the company has maintained an AA ESG rating from MSCI, a feat that many biotech companies have not been able to achieve. The company is an industry leader when it comes to human capital development and its handling of toxic emissions and waste.
Unfortunately, the company has performed unfavorably when it comes to product safety and quality. But with collaboration with other major biotech companies, it’s likely that Amgen will show marked improvement and emerge as a solid investment for the biotech industry.
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