How To Invest in Environmental, Social, and Governance (ESG) Stocks

If you are ready to invest responsibly but aren’t sure where to find good environmental, social, or governance stocks, you’ve come to the right place.

SustainFi June 14, 2021

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What are ESG stocks?

ESG stands for environmental, social, and governance. ESG investing adds factors like greenhouse gas emissions to financial metrics such as revenues or profits. It is also called socially responsible investing (SRI), sustainable investing, and impact investing.

ESG investing channels money to companies with better environmental, social, and governance standards. By picking ESG stocks, you can support responsible companies without incurring fund management fees.

Do ESG stocks outperform?

The field of ESG investing is still very new, but there is a growing acceptance that investors who ignore climate or social risks will lose money. Further, a growing body of academic research shows that ESG stocks or funds can generate better returns. For example: 

  • A 2020 report by the NYU Center for Sustainable Business analyzed over 1,000 studies on ESG and performance, finding a positive correlation
  • Morningstar’s research from 2020 found that most ESG funds they tracked outperformed their conventional counterparts over ten years
  • A 2019 report by the Morgan Stanley Institute for Sustainable Investing found that between 2004 and 2018 ESG funds had lower downside risk than traditional funds

🔔 You can learn more about ESG stock performance here.

Should you buy single stocks? 

Although it requires more work than investing in funds or through robo-advisors, stock picking can be exciting and a great way to support businesses you believe in. Investing in single stocks helps you learn about companies, and you also don’t need to pay a fund manager any fees.

What are the pros of buying single stocks?

  • No fund or portfolio manager fees
  • You understand what you own
  • Easy to buy and sell
  • Easy to optimize for taxes (for example, by selling losers before year-end)

However, buying single stocks is not for you if you don’t want to do much research. It is also hard to diversify your investments if you only invest in a few stocks. For this reason, personal finance experts recommend picking stocks only for only a small percentage of your assets and putting the rest into funds. And your emergency fund should not be invested in stocks.

What are the pros of buying single stocks?

  • Hard to achieve optimal diversification
  • Riskier than diversified funds
  • Very time-intensive

How can you find ESG stocks?

There are several ways you can find ESG stocks.

Sustainable company lists

Several business publications publish rankings of sustainable companies each year. Here are some of these lists:

  • Free investing app Public provides a list of sustainable stocks and funds grouped into themes like “Green Power” and “Women in Charge.” You can learn more here or sign up directly
  • Barron’s and ESG mutual fund manager Calvert rank the 100 most sustainable U.S. companies every year using 230 indicators. You can see the complete list here (requires subscription)
  • Just Capital ranks America’s largest publicly traded companies on just business behavior
  • The Wall Street Journal publishes a list of the world’s most sustainably managed companies
  • The CDP (formerly Carbon Disclosure Project) publishes a list of the world’s most energy-efficient companies here
  • Canadian research firm Corporate Knights has a list of the world’s most sustainable companies

ESG ratings

You can check the ESG scores of the companies in your portfolio or the ones you are curious about. Several rating providers, including MSCI, FTSE, Thomson Reuters, and Sustainalytics, provide these scores. Many ratings are only available to professional investors on a subscription basis, but you can get free data from MSCI or Sustainalytics.

MSCI Ratings

MSCI is a major provider of financial data and analytics. Many large ESG exchange-traded funds (ETFs) and asset managers use their framework. MSCI has analysts analyzing data from over 100 datasets, company disclosures, government databases, and media outlets.

MSCI assigns ratings from AAA to CCC to most public companies in the U.S. and Canada, focusing on the key issues for each industry. For example, environmental issues include carbon emissions, product carbon footprint, and climate change vulnerability. MSCI focuses on key issues for each industry, so that carbon and toxic emissions are more important for refineries than for retailers. Stocks are compared to their industry peers.

MSCI’s ratings for over 2,800 companies are available for free on their site.

Sustainalytics Ratings

Amsterdam-based Sustainalytics provides free access to ratings for over 4,000 companies. In early 2020 Sustainalytics was acquired by Morningstar, a mutual fund rating provider. Sustainalytics has over 200 analysts compiling data such as company reporting, emissions, and third-party research.

Sustainalytics ratings are available through their site and Yahoo Finance (check the Sustainability tab on the right after you search for a stock). Yahoo Finance actually provides more accessible Sustainalytics data than the Sustainalytics site.

Sustainalytics ratings are Risk Scores, and the higher the score, the higher the risk of a particular stock overall and in each category (Environmental, Social, and Governance). The lower the risk score, the better. Scores are comparable across different companies and industries.

For example, Tesla has a high ESG Risk Score overall because of poor social and governance scores. Its Environmental Risk Score is very low. Tesla makes environmentally-friendly electric cars, but it has been criticized for its governance, product safety, and worker treatment.

So it’s a good time to think about what issues are more important to you. If climate change is more important than social or governance metrics, Tesla is a good ESG stock (valuation aside). But not so if you care more about social or governance scores.

You can also check Product Involvement Areas to see if a company is involved in any controversial products, such as thermal coal. (Tesla is not).

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How do you invest in green companies?

Companies with high ESG scores may have low carbon emissions, good governance standards, and treat workers well. But stocks that typically score high on ESG – like Microsoft – are generally not the ones addressing climate change. To invest in climate change solutions, you can look at companies in the clean energy space.

Renewables are now cost-competitive with fossil fuels. Many countries are focused on cutting emissions and put in place net-zero targets. Clean energy and cleantech stocks are benefiting from these developments.

However, like Tesla, green stocks may not have high ESG ratings because of social or governance issues. Some of the top investors in clean energy, like NextEra Energy, also have legacy oil and gas assets, which prevents them from getting high environmental scores.

Green energy majors

Wind and solar energy producers like NextEra Energy (NEE), Iberdrola SA (IBE), and Enel SpA (ENEL) have been very popular among green investors. These companies made early bets on wind and solar farms and now run efficient international operations. Rome-based Enel SpA (ENEL) is the world’s largest renewable energy producer outside China. It is followed by Spanish competitor Iberdrola SA (IBE). Florida-based NextEra (NEE) has become the largest generator of wind and solar power in the U.S.

Other green energy plays include Brookfield Renewable Partners (BEP) and Neoen (NEOEN). BEP operates nearly 6,000 hydroelectric, solar, and wind facilities in the Americas, Europe, India, and China. Paris-listed Neoen operates solar and wind farms in 13 countries.

Wind power companies

Another way of investing in the clean energy transition is to buy wind power stocks. Wind power is already one of the cheapest forms of energy, representing around 6% of global power generation. It is projected to more than double by 2030. In the meantime, more companies are committing to source all of their electricity from renewables.

To generate wind power, developers install wind turbines that convert wind into electrical energy. Vestas (VWS) and Siemens Gamesa (SGRE) are two leading global wind turbine manufacturers. Denmark-based Vestas (VWS) dominates the onshore (or land) market and has a roughly 15% global market share. Spain-based Siemens Gamesa Renewable Energy (SGRE) is the market leader in offshore turbines. Siemens Gamesa benefits from its scale and cutting-edge wind turbine technologies. Diversified conglomerate General Electric (GE) is also active in the turbine space.

TPI Composites (TPIC) is a wind-blade manufacturer, selling its products to turbine manufacturers like Vestas and Siemens Gamesa. Blades are an expensive and critical component of a wind turbine (up to 20% of its cost). TPIC is poised to benefit from the growing outsourcing of wind blade manufacturers.

You can also look into wind project developers like Orsted (ORSTED). Founded in 1973 as the Danish Oil and Natural Gas company, Orsted transitioned to renewables in 2017. It currently operates 26 offshore wind farms, including the two largest offshore wind farms in the world. Orsted is a global leader in offshore wind with a 25% market share.

🔔 Learn how to invest in wind energy.

Solar companies

Solar panels are the cheapest way to generate electricity in many places. Solar energy is also benefiting from regulations. For example, California required all newly constructed buildings to have rooftop solar panels starting in 2020. Nevada has required utilities to obtain half of their power from renewables by 2030. Companies like Apple and Amazon are actively embracing solar to reduce emissions.

You can invest in solar panel manufacturers, solar panel installers, and utilities that rely on solar power. For example, First Solar (FSLR) is one of the biggest solar panel manufacturers and solar project developers in the world. While the solar panel market is very competitive, FSLR should benefit from continued growth in demand for solar panels. They also continue to win large solar farm installations. FSLR stock has been volatile, so do your homework before investing.

SolarEdge (SEDG) is the market leader in inverters for solar panels. An inverter is the “brains” of the solar panel, transforming the direct current (DC) power into alternating current (AC). SolarEdge’s innovative inverter business has grown twice as fast as the industry over the past five years.

You can also look at residential solar companies like Sunnova Energy International (NOVA) and Sunrun (RUN). These companies install rooftop solar panels in people’s homes. Interest in solar installations has increased in two key markets, California and Texas, after devastating wildfires in California and power outages in Texas. But both stocks have been very volatile.

Hydrogen companies

Hydrogen has been talked about as an alternative energy favorite for a long time. In fact, it was hydrogen that powered the first internal combustion engine two centuries ago. It also powered NASA’s program to send the first man to the moon. But due to prohibitive costs, hydrogen never took off and accounts for less than 1% of energy use today according to the International Energy Agency. With growing interest in renewables, we are now seeing more investor focus on hydrogen.

While hydrogen technology should grow, hydrogen stocks are not for the risk-averse due to high valuations and lack of profitability. It’s going to be a long time until hydrogen is cost-competitive with fossil fuels.

Two of the best-known hydrogen stocks are Plug Power (PLUG) and Ballard Power Systems (BLDP). They make hydrogen fuel cells that power trucks and other machinery. Neither company is profitable despite high market capitalization, and both are extremely risky. Both had a great run in 2020 before giving away most of the gains in 2021.

New York-based Plug Power (PLUG) makes hydrogen fuel cells that power forklifts. PLUG also sees opportunities in electric vehicles (like DHL vans) and data center backup power. PLUG contracts with Amazon and Walmart to power forklifts in warehouses.

Ballard Power Systems (BLDP) is a Canadian company that makes hydrogen fuel cell technology. It has a JV with China’s largest diesel engine manufacturer Weichai Power. Ballard has also been working with the Daimler-Volvo Joint Venture to produce hydrogen fuel cells for trucks.

🔔 Learn how to invest in hydrogen funds and stocks.

Electric car stocks

According to the Center for Climate and Energy Solutions, transport accounts for 15% of global carbon emissions. The electrification of transport is the main frontier in decarbonization. California is banning new internal combustion engine (ICE) vehicle sales by 2035. Many countries have done the same, typically with bans by 2030-2060.

Electric vehicle (EV) sales should explode due to customer awareness of climate, government regulation, and dropping prices. In addition to being emission-free, EVs do not require maintenance like oil changes, don’t make noise, and accelerate faster.

However, like hydrogen power stocks, electric car stocks trade at very high valuations and have been very volatile. EV adoption remains low, and many technical challenges – such as limited range – need to be overcome.

Despite mixed ESG scores, Tesla (TSLA) is an obvious choice that has been written about a lot. Tesla dominates electric car sales in the U.S., but over the past few years, many “wanna be Teslas” went public. They include the troubled “Tesla of trucks” Nikola (NKLA), its electric truck peers Lordstown Motors Corp (RIDE) and Workhorse Group (WKHS), electric powertrain company Hyliion Inc. (HYLN), luxury EV manufacturer Fisker Inc (FSR), and electric van startup Canoo (GOEV).

These companies are very early stage and do not generate profits and, in most cases, revenues. In fact, it is not uncommon to see projections with no revenue until 2024-2025.

In the meantime, China is emerging as a major market for EVs with several homegrown brands, including Nio (NIO), BYD (BYDDY), Li Auto (LI), and Xpeng (XPEV).

Nio (NIO), known as “the Tesla of China,” is the best known pure-play premium Chinese EV maker. Founded in 2014 and backed by Tencent Holdings, NIO makes high-end, premium SUVs. NIO survived many ups and downs, including a failed IPO on the New York Stock Exchange in 2018, a battery recall, and a downturn in the Chinese auto market in 2019.

Warren Buffet-backed BYD (BYDDY) is the world’s largest electric car manufacturer and a major battery supplier. Founded in 1995 in Shenzhen, China, BYD began as a rechargeable battery manufacturer for mobile phones. It has since successfully expanded into lower-end electric cars.

Nasdaq-listed Li Auto (LI) is the largest electric SUV maker in China. Li Auto is focused on the mid to high-end market. It is currently the only maker of large smart SUVs for growing family demand. Li Auto was founded in 2015 and is backed by TikTok owner Bytedance and e-commerce group Meituan Dianping.

Another “Chinese Tesla,” Alibaba-backed Xpeng (XPEV) is the third Chinese EV maker to list in the U.S. Like Tesla, Xpeng has pitched its smart features, such as autonomous driving and voice assistants. It is targeting the mid to high-end market. Today Xpeng has over $34 billion in market cap.

If cars aren’t your thing, Beijing-based NIU (NIU) makes electric scooters for the global market. NIU is listed on Nasdaq and has over $2.5 billion in market cap. NIU wants to take advantage of the micromobility (travel for distances less than 8 miles) trend in major cities. The company is looking to expand in Europe and the U.S. and offer new products like electric bikes. Unlike many EV companies, NIU already makes money. It also benefited from the COVID trend for individual transport.

Electric car suppliers

Electric vehicle stocks are trading at sky-high valuations. Tesla’s market value is over four times that of Ford and General Motors combined. We suggest also looking into EV supplier stocks for greater value.

Most EVs are powered by rechargeable lithium-ion batteries. The lithium-ion battery is the priciest component of an EV, accounting for 25-30% of the cost. With EV production rising, major battery makers – CATL, Panasonic, BYD, LG Chem, and Samsung SDI – are expanding capacity. In fact, demand for lithium-ion batteries has more than doubled since 2015. As lithium-ion batteries are becoming more powerful, there are further opportunities in public transport, consumer electronics, and energy storage.

Established in 2011 and based in Fujian, China, Contemporary Amperex Technology Co or CATL (300750 CH) is the world’s largest lithium battery maker. Historically focused on Chinese automakers, CATL has started working with leading global OEMs such as Tesla, BMW, Toyota, and Daimler. CATL is also working to commercialize batteries made without cobalt, an expensive raw material. 

Lithium – a soft, silvery metal – is a key component in the manufacture of lithium-ion batteries. While not very scarce, it is expensive to extract from hard rock or salt brine. Chile – the Saudi Arabia of lithium – is home to over 50% of the world’s reserves.

North Carolina-based Albemarle Corp (ALB) is the world’s largest lithium producer, representing roughly one-third of the industry. It mines deposits in South America and Australia. ALB is also involved in bromine, refining catalysts, and applied surface treatments. Lithium is the largest segment at over one-third of revenue. ALB is solidly profitable and pays a dividend. 

Sociedad Química y Minera de Chile (SQMis the world’s second-largest lithium producer behind Albemarle, with around 15% share. SQM hails from Chile and has some of the best lithium deposits in South America. SQM’s access to brine deposits in the salt flats of the Atacama desert is a key advantage due to relatively low lithium manufacturing costs. The company has strong profit margins and pays a dividend. 

How can you research ESG stocks?

Doing your research is particularly important if you want to invest in clean energy or cleantech stocks.

Sustainability is hot, and a lot of green businesses with unproven concepts get sky-high valuations. For example, short-seller Hindenburg Research accused electric truck maker Nikola (NKLA) and plastics recycler Loop Industries (LOOP) of fraud. Nikola admitted to releasing a video that showed one of its trucks moving on its own while, in fact, it was rolling down a hill. With regards to Loop Industries, Hindenburg Research said that its supposedly revolutionary way of recycling plastics was “impossible.” The stock prices of both companies collapsed after the allegations became public.

Hot electric truck company Lordstown Motors (RIDE) also plummeted after it issued a going concern warning and said it overstated its orders.

A lot has been written about researching and investing in stocks. You can find many comprehensive guides online. They will tell you about multiples like price-to-earnings (P/E) ratios and debt levels. But there is less information about finding sustainable companies.

What resources do you have to gauge a stock’s sustainability credentials?

ESG Ratings

We recommend checking ESG ratings from MSCI and Sustainalytics, even though the two agencies often disagree. For example, MSCI assigns more weight to environmental factors.

In addition, some green companies like Tesla (TSLA) or Plug Power (PLUG) actually have low ESG scores. This is usually due to poor social or governance ratings. Some green utilities also get poor environmental scores because they still own legacy oil and gas assets.

Sustainability Reports

In addition to ratings, you can review sustainability reports. In the U.S., many companies disclose ESG data in their voluntary sustainability reports. In 2019, 90% of S&P 500 companies published sustainability reports vs. 20% in 2011. However, in the absence of standards, companies tend to disclose metrics that make them look good.

It’s also impossible to compare companies because they define terms or perform calculations differently. For example, some companies define greenhouse gas emissions as carbon dioxide and other greenhouse gases; others report only carbon dioxide.

Even companies that take disclosure seriously may not know exactly how sustainable they are because they rely on suppliers that don’t disclose their environmental impact.

A sustainability report may be most useful to you if it isn’t there. We would view the lack of a sustainability report as a red flag, as well as the use of narrative without numbers to back it up. It clearly signals that the company doesn’t care much. UK climate nonprofit CDP publishes a list of companies that have not filed climate disclosure.

Corporate communications

More broadly, companies that are serious about sustainability tend to talk about it. If they never set emissions goals or pledge to reach net-zero emissions targets by a specific date, that is not a priority for them.

Here are some questions you could ask:

  • Has the company set any emissions goals or pledged to reach net-zero emissions by a specific date?
  • Does the company include Scope 3 emissions (i.e., emissions from suppliers and customers) in its targets?
  • When reducing emissions, do they just rely on carbon offsets, or are they investing in technology?

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