Top 5 Best ESG Stocks to Watch 2024
ESG and hence ESG stocks have become a popular acronym in the investing world lately.
If you are wondering what are the best ESG stocks to watch for, then you already know what ESG is. If not, then let us give you a quick intro following more information on ESG stocks.
We overview here the advantages, disadvantages, crucial aspects to consider regarding ESG stocks and our subjective overview of the best ESG stocks to watch.
Table of Contents
An Introduction to ESG and ESG Stocks
ESG stands for Environmental, Social, and Governance.
These factors are used to make important investment decisions and build a portfolio that matches the values of investors - values like being environmentally conscious and socially responsible.
You may wonder if E, S, and G are all non-financial factors. What do they have to do with investing and earning returns?
While they may appear to be non-financial, the proponents of ESG investing beg to differ.
They believe that ESG eventually affects the finances of businesses and the returns they offer to investors.
They believe that recent developments like the Paris Climate Agreement, carbon taxes, and costs companies have to bear for emissions affect businesses financially.
At the same time, emerging industries like clean energy will likely lead to new business opportunities while also making certain existing businesses obsolete. So, the financial implications are poised to play out.
If you are an investor or a trader, it helps to know at least a minimum about ESG stocks and investing.
The Millennials and Gen-Z generations are known to be driving ESG investing.
They will also likely be the ones with the most wealth in the next decade or two as the baby boomers complete their life cycle. So, there is a good chance that ESG investing may significantly affect the way people invest.
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What are ESG Stocks?
Now that you have a basic idea of what ESG is, you probably want to find the best ESG stocks to watch. However, first, let us try to understand how the concept of ESG is implemented by businesses and hence reflected in the financial markets.
As you may be aware, governments around the world are increasingly focusing on reducing their carbon emissions and going net zero. They are formulating policies to work towards those goals.
Businesses are, hence, driven to do more on their part. Large companies have already started publishing ESG reports highlighting measures that they have undertaken to reduce their emissions, be more socially responsible, and tighten up their corporate governance.
As ESG becomes more prevalent, more companies (even the smaller ones) will undertake measures that reduce their carbon footprint, minimize the impact of their activities on biodiversity and the environment, and engage more with their local communities.
Every company that adopts and implements ESG policies tend to be viewed as “ESG stocks”. Currently, few companies are adopting ESG in a significant way and hence, they are the ones considered to be “ESG stocks”.
From the point of view of investing and trading now, it helps to know which stocks rank high on ESG performance.
To rank something, one needs to know where they stand in relation to others. One needs to know what ESG scores are - which is what we will discuss next.
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What is an ESG Score?
In order to rate how well a company performs on ESG metrics, there must be an objective way that is consistent across industries and businesses.
Various rating agencies assign ESG scores to businesses based on an evaluation process that they undertake. The idea behind assigning scores was to be able to compare and filter companies.
However, every rating agency has its own scoring scale and it has become a bit challenging to easily compare. So, it becomes important to first read about an agency’s rating scale. It is also important to understand what specific issues within E, S, and G the rating agency analyzes.
Usually, rating agencies assign weights to various criteria. Then, they evaluate the performance of companies on those criteria.
The sum-product of the performance levels and the weights of each criterion is calculated to arrive at an ESG score.
Besides rating agencies, non-governmental organizations (NGOs), standards bodies, consulting firms, and government institutions may also assign ESG scores.
Advantages and Disadvantages of ESG Stocks
ESG stocks and investing can be a good thing, especially if it reflects your personal values. Investors are increasingly becoming more aware of what they care about and want to manifest those beliefs in their investing.
At the same time, it can be considered important that the portfolio performs and generates a meaningful return.
Equally important is to avoid investing in businesses that claim to be ESG-focused but aren’t doing anything meaningful.
The technical term for this is greenwashing where businesses deceive people into believing that their products and processes are environmentally friendly when in fact, they aren’t.
Advantages of ESG Stocks
There are three key advantages of investing in ESG stocks:
- You may be genuinely making an effort to contribute towards a better world by actually putting real money behind one’s beliefs and values.
- You could be aligning (knowingly or unknowingly) your portfolio with the next big trend, especially as ESG screening could help find businesses that may grow significantly as a result of the massive global transition to clean technology and sustainability.
- You may be investing in businesses that are nimble enough to succeed in a regulatory regime where basic ESG benchmarks will be mandatory. The ones that fail to adapt could be adversely affected.
Disadvantages of ESG Stocks
The following are three important drawbacks of ESG stocks that one should be aware of:
- There are too many rating scales and platforms doing their own analysis. It isn’t easy comparing businesses especially if different rating agencies assign ESG scores.
- Businesses could sometimes have a high ESG score but still, be involved in heavy carbon emissions. For example, certain mining companies have high ESG ratings even though they may be mining fossil fuels like coal on an industrial scale. Avoiding greenwashing also requires some research on the investor’s end.
- You may end up compromising on financial performance in search of the best ESG companies. Sometimes, ESG funds have higher expense ratios (known as greenium) as the fund manager claims to do more work/research to justify the higher fees. This ultimately eats into your returns.
Top 5 Best ESG Stocks to Watch
Now that you have a good general idea of what ESG stocks entail, let’s look at the top 5 best ESG stocks to watch. The following list should always be considered subjectively and will vary based on each individual investor:
Texas Instruments is well-known for designing and manufacturing semiconductor devices and integrated circuits. It is the largest maker of analog chips in the world.
- Texas Instruments’ stock has gradually risen from 1999 up until 2023 (Yahoo Finance). It has witnessed phenomenal business growth as the world became more digitized.
- Texas Instruments publishes its ESG performance in its Corporate Citizenship report. It has clear and time-bound goals towards which it has made progress.
- However, the recent price-action isn’t encouraging as the stock hasn’t gone anywhere since almost two years.
- Despite the fall in technology stocks, Texas Instruments isn’t cheap. Its price-to-earnings ratio is 19 while its price-to-book ratio is over 11.
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2. JB Hunt Transport Services Inc
JB Hunt Transport Services is one of the leading transport companies in America. It primarily operates in the rail carrier and trucking segments.
- JB Hunt’s stock has been on a bull run since 2003 and has grown its revenues and cash flows significantly.
- JB Hunt has increased its dividend payments every year in recent times while maintaining a low dividend payout ratio of less than 20%.
- The transportation sector is among the more sensitive sectors to climate-related policies and could add to price volatility.
- There could be near-term pain for the company if the US economy goes into a recession due to the rate hike cycle.
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Nvidia is one of the world’s leading designers of discrete graphics processing units, also known as semiconductors. Its chips are used in gaming PCs, data centers, and other digital systems.
- Nvidia has shown an ability to innovate. It has expanded its business in the emerging areas of artificial intelligence and autonomous driving.
- Nvidia has significant goals related to renewable energy and has already reduced its emissions per employee in recent years.
- Nvidia’s price fell by over 50% amidst rising inflation and rate hikes. The tech sector, in general, isn’t still out of the woods. So, price volatility may be high at the moment.
- Recent quarterly earnings results have seen revenue, operating income, and net income all fall quarter-over-quarter while EPS has also missed street estimates.
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Microsoft is among the largest and most well-known software companies in the world. It has products and solutions in a variety of segments like cloud computing, personal computing, and digital infrastructure.
- Microsoft is one of the leaders in ESG initiatives, having committed to going carbon negative by the year 2030.
- Microsoft benefits from important competitive advantages like network effects and strong brand identity.
- However, Microsoft’s CEO has himself stated that it could be a tough couple of years if the global economy goes into a recession due to rising rates and inflation.
- Further rate hikes could lead to more stock price correction as higher discounting rates pull down valuations of growth/tech companies like Microsoft.
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Verisk Analytics offers risk management and data analytics solutions, mainly to the financial industry. It is believed to have a monopoly in the property and casualty insurance market.
- The top 100 property and casualty insurance customers in the US are Verisk customers.
- Verisk has a clear ESG policy and was ranked 3rd out of 100 companies by Investor’s Business Daily.
- Verisk has had modest revenue and net income growth over the previous five years.
- The stock’s price-to-book ratio is almost 14, much above the 5-year average of 11.3.
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Best ESG Stocks to Watch: Conclusion
We hope that you now have a good understanding of what ESG is, how ESG performance is evaluated, and how to select the best ESG stocks to watch or add to your tracking list.
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What is an ESG stock?
ESG stocks are defined by companies which adhere to the ESG principles - i.e., Environmental Governance Social. Generally speaking, these companies have the ultimate goal of improving sustainability and corporate responsibility.
What are the top 3 ESG stocks?
While this kind of question is always subject to the individual, potentially the top 3 ESG stocks include: Texas Instruments Inc, Nvidia Corp and JB Hunt Transportation Inc.
Other Articles of Interest:
- Nvidia Share Price Forecast 2023, 2025 and 2030
- Green and Sustainable Investing
- What is Green Investing?
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