The ESG investing boom is in full swing as investors both big and small are using their values to guide investment decisions. So far this year, investors have contributed $39 billion to sustainable funds, not to mention the green bonds and ESG stocks that have seen big inflows over the past couple years.
IBD's third annual Best ESG Companies special report, featuring our table of top ESG companies with both high Dow Jones ESG scores and superior IBD Composite Ratings, can help investors pick the best ESG investments.
These 100 ESG stocks have shown especially strong performance in a volatile market this year, with the top three stocks on IBD's Best ESG Companies list each having a Composite Rating above 90.
Leading the pack is Microsoft. The software giant boasts a 98 Composite Rating and has seen a 12-month gain of 58% through October 28, 2021. In second is U.K. chemical manufacturer Linde, which has notched a 45% gain over the last 12-month period and carries a Composite Rating of 93. Rounding out the top three is tech consulting firm Accenture, with a 97 Composite Rating. On a technical basis, Linde is building a new base, and Microsoft and Accenture just broke out of bases in the past week, according to MarketSmith pattern recognition.
Best ESG Stocks
Other notable performers on IBD's Best ESG Companies list include tech firms Adobe (21) and Google (54). Adobe and Google also rank on IBD's Long-Term Leaders list, with Google holding a spot on the IBD 50 stock list.
This year, we partnered with Dow Jones to determine the top ESG stocks of 2021. (IBD is owned by News Corp and operates within Dow Jones business unit.) Dow Jones calculates sustainability scores on a company's performance based on 26 environmental, social and governance categories. That publicly available company data is combined with daily media coverage from more than 9,000 sources to create an aggregate ESG score.
IBD first screened for the top 15% of the 2,360 U.S.-traded stocks with Dow Jones ESG scores. We narrowed our list further by screening for companies with an IBD Composite Rating of 85 or higher. Ties were broken by filtering for Relative Strength Rating and then by EPS Rating. That gave us the top 100 ESG stocks.
Dow Jones ESG Ratings
So which are the best ESG stocks to buy?
Although the market for ESG stocks continues to reach new heights in terms of popularity and capital inflows, there are some who see a downside to ethical investing. These analysts argue that ESG funds deny investors better returns that they could otherwise be making with some other growth stocks.
Regardless, some highly rated ESG companies make better investments than others, especially over the long term.
"Sustainability makes sense especially when thinking of long-term investing," said Borja Monforte, research director for Dow Jones' ESG and Impact Investing, in an interview with IBD. "An investor might decide to disregard ESG aspects when investing in a specific company and may get a better return in the short term. But the important question here is, 'Is that an effective and sustainable investing strategy in the long term?' Probably not."
And for companies like Microsoft and others, proving that they meet and exceed ESG goals provides a positive message that bolsters the corporate brand.
How To Find And Buy The Best ESG Stocks
"Reducing its carbon footprint has been a core mantra at Microsoft over the last five years or so," Wedbush Securities analyst Daniel Ives told IBD. "It's now becoming more front and center for investors, especially on ESG plays."
Investors interested in finding growth stocks with a sustainable focus can apply IBD's investing system to identify high-growth ESG stocks with the most potential.
As always, it's important to first identify the current market trend. You can find this information in The Big Picture column, published daily within the "Market Trend" section of Investors.com.
If the market trend is favorable, you can look for the best ESG stocks to buy and watch from the Best ESG Companies list compiled by IBD. Then you can further narrow your search by using IBD's proprietary screens and ratings to quickly identify market leaders.
Remember to always verify an ESG stock's fundamental and technical characteristics to determine proper buy points. You can read more in-depth information on how to find and buy the best ESG stocks here.
ESG Investing With ETFs
Investors aren't the only ones taking advantage of ESG market growth. Asset managers have responded to demand by adding a number of sustainable themed mutual and exchange traded funds to their offerings, giving investors more choices to gain exposure to ESG companies. Morningstar reports that 36 ESG-related funds were launched in the U.S. in the first half of 2021.
Notable newcomers include the Engine No. 1 Transform ETF. That fund launched in June after the activist investing firm secured $100 million after their successful battle against ExxonMobil's board of directors earlier this year. Fidelity also launched its Fidelity Women's Leadership ETF, which invests in companies that prioritize women's leadership development.
The top three ETFs that brought in the most capital inflows in the most recent quarter of 2021 according to Morningstar include iShares ESG Aware MSCI USA ETF, BlackRock US Carbon Transition Readiness ETF and Parnassus Core Equity Investor.
The money pouring into ESG investing makes it harder for both investors and businesses to ignore. All companies will need to appeal to ESG investors as investments into sustainable themes become a bigger share of the investment pie.
IBD/TIPP Poll: ESG Popularity Highest Among Young Investors
Evidence of ESG investing's popularity growth is supported by a new IBD/TIPP survey. Overall, 43% of investors said they were somewhat or very familiar with the topic of sustainable investing.
Awareness of ESG stocks was particularly high among younger investors. Forty-six percent of investors age 25 to 44 reported that they were very familiar with ESG stocks. That number dropped to 9% for investors 45 years and older.
Additionally, nearly three out of four investors (77%) said it was important to invest in companies that largely aligned with their own personal values. That sentiment was highest among city dwellers, with 60% of urban residents responding that it was very important for organizations to reflect their values.
But ESG Investors Still Value Performance
While the popularity of ESG stocks has grown, investors still value performance when it comes to selecting investments.
"Even among the groups that were more favorable to ESG values, they still ranked return on investment as more important," said Raghavan Mayur, president of TechnoMetrica, which conducts the IBD/TIPP Poll in partnership with Investor's Business Daily.
Governance issues related to corporate ethical standards curried the most support from investors, with 47% saying that a company that has an independent board of directors that protects shareholder rights was more important than return on investment.
Social attributes also ranked highly. Commitments to fair employee wages got notable support from investors, with 39% ranking wage issues above investment returns. Climate concerns appeared to get the lowest scores from investors. Only 21% said that a company's commitment to environmental concerns was more important than return on investment.
The September IBD/TIPP Poll reflects an online survey of 1,305 adults, including 452 self-described investors.
ESG Investing: Values vs. Profits
The main debate around ESG investing continues to center on performance. Can investors pursue ESG stocks that benefit the public good while also boosting their bottom line?
Martin Whittaker of JUST Capital, an independent nonprofit that tracks and measures a number of corporate ESG performance areas, says there's strong evidence to suggest investors don't need to sacrifice profits to fit their value.
"When we look at baskets of companies in terms of their returns in the market, most JUST Capital companies outperform by a considerable margin," JUST Capital CEO Whittaker said.
But some analysts remain skeptical.
Mark Gorzycki and Mahesh Kashyap, co-founders of OVTLYR, an AI-driven behavioral analytics tool for retail investors, found little evidence of an ESG investing edge. "We're thinking (the pandemic) was probably the Super Bowl of ESG," Gorzycki said. But OVTLYR data showed that returns on ESG stocks and funds were hard to distinguish from those of the broader market. "In the cases that we've seen so far, performance actually tends to look a little bit worse."
Reframing The ESG Debate
Gorzycki says much of the debate over ESG benefits could be resolved by reframing the sales pitch on sustainable funds.
"We've seen repeatedly these claims about how this type of risk mitigation is the future and it's going to, in turn, start driving performance," Gorzycki said of ESG investing. But those claims rarely translate to the stellar returns promised by portfolio managers. Instead, Gorzycki offers another approach.
"There is a perfectly viable selling point that ESG could be shaped around," Gorzycki said. "You can get a market return and feel good about it. Why isn't that being sold?"
But Whittaker says the debate is healthy for the maturation of ESG investing. "It's changed the way we even talk about what ESG is and why it matters," Whittaker stated. He added that while companies can create value for stakeholders and have a broader societal impact, returns are not always inevitable.
"Being as disciplined about how you measure performance on (ESG goals) is just as important as being disciplined and properly measuring financial performance," Whittaker said. "That's why I think that authenticity is going to be one of the keys to future performance."
What's Next For ESG Investing?
Guiding that future performance will be more standardization in ESG investing rules. And coming guidelines from the Biden administration seek to help investors determine what's under the hood in ESG funds and performance.
"The focus (in ESG investing) is on trying to create a level playing field around standardization," Whittaker said. "I think a lot of investors want to know that what's on the label is actually what's going on in the fund."
SEC Chairman Gary Gensler has made ESG rule standardization a policy priority. In late September, the agency proposed new rules to bring more transparency on how funds disclose shareholder votes and decision-making processes on a range of ESG themes.
Gensler and the Fed also plan on tightening climate reporting standards to make it more difficult for companies to "greenwash" (misrepresent) their environmental efforts and impact.
"If you're in the ESG space, as an asset manager or as an investor, you better make sure your house is in order," Whittaker said of coming ESG regulations. "You have to be as disciplined and as objective about what ESG means as you are about measuring financial performance."
Follow Alexis Garcia on Twitter @IBD_Alexis for business news and more.
