It has been a challenging year for ESG investing, or investing with an eye toward environmental, social and corporate governance issues. After years of booming growth, U.S. investors last year started pulling money out of funds billing themselves as environmentally or socially aware, with a total net outflow of $7 billion in the 12 months ending July 31, according to fund data company Lipper.
Republican leaders in Texas and Florida pulled state funds out of BlackRock (BLK), the nation's largest money manager, for its support of ESG investing. And BlackRock rewrote much of its promotional material to replace the term ESG with words such as sustainability. Also this year, major brands such as Target (TGT) and Anheuser-Busch InBev's (BUD) Budweiser suffered sales drops due to backlashes from consumers upset at promotions highlighting gay and transgender communities.
Politics aside, ESG investing is "suffering a major identity crisis that is perhaps deserved," says Robert Jenkins, global head of research for Lipper, which publishes the Refinitiv ESG ratings. Investors and others have pushed back hard against overhyped ESG credentials (a practice sometimes called greenwashing). But ESG is far from dead. Now, corporate executives and fund managers are more often seeking to provide investors with precise terminology and specific facts to show a company's commitment to issues that are truly material to the firm's business. "It is a maturing, necessary step," says Jenkins.
A further step toward maturity may be in the works: The Securities and Exchange Commission (SEC) is considering new rules to standardize ESG-related data so that investors can better compare options. Proposals under consideration would require companies to post information on climate risks they face and crack down on investment funds that misleadingly claim to focus on ESG-friendly stocks.
For now, although the nomenclature is changing and standards are evolving, the very real risks that companies are addressing still fall under the broad environmental, social and governance rubric, says Andrew Behar, chief executive officer of As You Sow, a nonprofit that uses shareholder advocacy to advance environmental and social causes. "You can't spell investing without the letters E, S and G," he quips.
Kiplinger's favorite ESG stocks and funds
With this in mind, here is the Kiplinger ESG 20, a list of our favorite stocks and funds with an environmental, social or governance focus and healthy financial prospects.
Each of our picks for the best stocks to buy has a strong record on at least one ESG pillar. But no company can be all things to all people; a firm we've highlighted for its strong governance focus, for example, may not also be an environmental star. As such, we have broken down our stock picks into three separate categories:
Environmental stewards: These companies offer products, services or technologies that provide solutions to problems such as greenhouse gas emissions, air and water pollution, or resource scarcity.
Social standouts: These companies support their employees, customers and suppliers and treat them fairly, while positively impacting their community and the world at large.
Governance leaders: These companies are committed to diverse and independent boards, strong ethics policies, responsible executive pay that is tied to performance, and combatting corruption.
Meanwhile, our five favorite ESG funds are all focused on sustainability, but each has a unique approach. These funds might focus on an ESG category, seek a measurable impact on a specific challenge, integrate ESG criteria into a broader strategy or engage with firms to improve ESG practices.
For details on how our picks have performed and why we think they are standouts, read on. All returns and data are as of August 31, 2023.
The Kiplinger ESG 20 at a glance
|Hilton Worldwide Holdings||HLT|
|Funds||Row 15 - Cell 1|
|Brown Advisory Sustainable Bond Fund||BASBX|
|FlexShares STOXX Global ESG Select Index ETF||ESGG|
|Green Century Balanced Fund||GCBLX|
|Impax Global Environmental Markets Fund||PGRNX|
|Putnam Sustainable Future ETF||PFUT|
Environmental steward: First Solar
First Solar (FSLR), a U.S.-based photovoltaic cell maker, returned a scorching 48% in the past year, and analysts expect continued growth thanks to federal green-energy subsidies.
The shares suffered a setback in August after an audit of a Malaysia factory found that local managers were holding back passports and wages from some immigrant workers. First Solar said it would return the passports and wages. Forced labor clearly violates the social pillar of ESG standards, but some analysts noted that it is a widespread issue and praised the firm for addressing the problem quickly.
As a major producer of environmentally friendly solar modules, First Solar maintains high scores for its environmental impact from ESG analysts.
Environmental steward: Levi Strauss
Jeans maker Levi Strauss (LEVI) was one of the worst-performing stocks on this list over the past year. But Stifel analyst Jim Duffy hopes for a rebound as the company seeks to boost profit margins by selling directly to consumers through its own stores and expanding into niches such as yoga wear.
ESG investors appreciate the firm's efforts to reduce pollution along its products' life cycle. Rachel Kitchin, a staffer for Stand.Earth, an environmental nonprofit, highlights Levi's moves to power its more than 1,000 stores and offices with renewable energy and to offer repair services at some of its stores, keeping old jeans out of landfills.
Environmental steward: Microsoft
The stock of the software giant Microsoft (MSFT) has been rising thanks to enthusiasm for its new artificial intelligence "copilot" assistance on search engine Bing and other offerings. Microsoft's combination of a rosy financial outlook and industry-leading antipollution measures – the company says it will be carbon-negative by 2030 – are why its shares are held by three of our ESG funds.
Impax Global Environment Markets co-manager Hubert Aarts likes Microsoft's commitment to slashing its greenhouse-gas emissions by switching to renewable energy sources to run its cloud computing operations.
Environmental steward: Prologis
Real estate investment trusts (REITs) have had a tough year, but the bulls believe Prologis (PLD) will outperform the sector because it specializes in warehouses, which enjoy sustained demand thanks to the growth in online shopping.
Prologis has installed so many solar panels on its warehouse roofs to reduce greenhouse gas emissions that it is the nation's second-largest generator of solar energy on company-owned and -used property, according to the Solar Energy Industries Association.
Environmental Steward: Xylem
Shares of Xylem (XYL), a manufacturer of water equipment, such as pumps, filters and treatment systems, nearly matched the S&P 500's 16% return over the past year. Goldman Sachs analyst Brian Lee expects the industrial stock to forge ahead thanks to a recent acquisition that he believes will raise 2024 earnings per share by 40% over 2022's levels.
Xylem is a favorite of many ESG investors because it sells tools and services that help reduce water waste. Data firm MSCI gives Xylem its top ESG grade of AAA, calling it a leader in clean technology.
Social standout: Nvidia
Nvidia (NVDA), the designer of video game and artificial intelligence chips, was the best-performing stock in the Kiplinger ESG 20 over the past year. And Wall Street analysts overwhelmingly think there is more room to run, as they project a 33% average annual earnings growth rate over the next few years.
The company has an annual staff turnover rate of just 5%, about one-fourth the overall rate for the semiconductor industry. The company matches employees' charitable donations and contributes up to $350 a month to its workers' student loan payments.
Social standout: Novo Nordisk
We added Danish pharmaceutical giant Novo Nordisk (NVO) to the Kiplinger ESG 20 because it is addressing health problems such as diabetes and obesity. It has also been hailed for its labor management, making several lists of the best places to work. Refinitiv gives the company an A+ on the social pillar of its ESG rating. And MSCI rates it AAA, calling it a leader in human capital development.
Anthony Eames, managing director of responsible investment strategy for Calvert Research and Management, notes that no pharmaceutical company is immune from criticism. But Calvert's veteran ESG fund managers invest in the stock because of the way the company balances profits with providing medicine at no or low cost to consumers facing financial difficulties.
Meanwhile, driven in part by demand for its popular new weight loss drugs Ozempic and Wegovy, Novo's revenue-growth prospects through 2025 are "double that of its peers, with stronger durability," says Morgan Stanley analyst Mark Purcell. Trading at more than 30 times expected earnings, the stock is a good one to pounce on when the market dips.
Social Standout: Salesforce.com
Salesforce (CRM), the largest customer relationship management software company, has reduced staff and has stopped booking bands such as U2 for its annual conference. But it still provides industry-leading benefits to remaining employees, such as up to 26 weeks of paid parental leave. And it provides free or deeply discounted software to more than 51,000 schools and nonprofits.
The combination of social benefits and renewed attention to profitability are why it's a top-10 holding for the ESG-focused Parnassus Growth Equity Fund, says co-manager Andrew Choi.
Social standout: Trane Technologies
Shares of Trane Technologies (TT), a maker of heating, ventilation and air-conditioning equipment, has returned nearly 36% over the past year. Its ESG bona fides have made it a choice of two of our ESG 20 funds.
MSCI awards Trane a triple-A ESG rating, highlighting its leadership in health and safety. Trane, with more than 37,000 employees worldwide, had a workplace injury rate in 2022 of about one-fourth the level of the average manufacturing employer in the U.S., at last report.
Social Standout: W.W. Grainger
Founded in 1927, W.W. Grainger (GWW) is a leading distributor of industrial supplies to a broad range of business, government and institutional customers. The stock returned 30% over the past 12 months.
Baird analyst David Manthey likes the company as a long-term play, suggesting new investors wait for a pullback to buy in. Grainger was named a best place to work by the Human Rights Campaign and a leading employer by the National Organization on Disability.
Governance Leader: Applied Materials
Although shares of Applied Materials (AMAT) – the biggest maker of semiconductor manufacturing equipment – boomed along with other tech stocks over the past year, most Wall Street analysts who follow the stock remain bullish, with 19 of 34 recommending the shares.
Parnassus's Choi, whose fund owns the stock, appreciates the chipmaker's independent and knowledgeable board of directors.
Governance leaders: CBRE Group
Most analysts expect CBRE Group (CBRE), the largest provider of commercial real estate services, to outperform its troubled industry over the next year or so in part because it provides services, such as facility management, that can cut costs for its corporate tenants.
Just Capital, a sustainable-investing research nonprofit, ranked CBRE tops in its industry for governance because of its independent and diverse board, as well as anti-corruption policies such as scheduled audits of ethics policy compliance and mandated anti-corruption training for all employees.
Governance leaders: Clorox
The easing of the pandemic appears to have dampened demand for cleaning products, so most Wall Street analysts are currently leery of Clorox (CLX) stock, giving it a collective Hold rating. Patient investors can meanwhile appreciate the stock's 3% yield.
And Just Capital ranks Clorox first in its industry for accountability to stakeholders for its independent board and a policy of tying executive pay to ESG metrics, such as making all containers recyclable or reusable.
Governance leaders: Hilton
Hotel company Hilton (HLT) returned more than 17% in the past year, and the outlook is bullish thanks to continued expansion of the company's hotel offerings and loyalty programs.
Refinitiv's ESG analysts say Hilton also outperforms its peers on governance. The board's committee chairs are all independent. Half of the directors are women, and a significant part of CEO pay is tied to the consumer discretionary stock's performance over the next three years, aligning executive incentives with the interests of shareholders.
Governance leaders: Target
Target (TGT) was the ESG 20's worst-performing stock over the past year, with the retailer losing more than 18%. Some consumers took offense at June's gay pride displays in stores, which hurt sales. Target has said it will "pause, adapt and learn so that our future approach to these moments balances celebration, inclusivity and broad-based appeal."
Despite the challenges of navigating this societal foment, ESG raters including Just Capital say Target maintains strong governance policies, such as mandatory ethics training and a highly independent, diverse board.
ESG fund: Brown Advisory Sustainable Bond
The Brown Advisory Sustainable Bond Fund (BASBX) is heavy in securities issued by multinational development banks, which "have a mission to provide investments to address sustainability and social issues," says co-manager Amy Hauter. Last year, the fund purchased debt issued by the Council of Europe to provide loans to Ukrainian and Russian war refugees.
The managers lightened up on corporate debt to position the fund more defensively over the past 12 months, which hurt performance. Sustainable Bond lost 3.2% over the past year, lagging the Bloomberg U.S. Aggregate Bond Index. The fund yields 4.0%.
ESG fund: FlexShares STOXX Global ESG Select Index ETF
The FlexShares STOXX Global ESG Select Index Fund (ESGG) is is the sole index fund in the Kiplinger ESG 20. It tracks a benchmark of 800 U.S. and international stocks that comply with the principles of the U.N. Global Compact, which calls for companies to operate responsibly in terms of human rights, labor and the environment, among other issues.
Firms that stand out on key ESG measures within their industry are included in the index; the highest scorers get greater weight. Microsoft and Apple (AAPL) are top holdings. The fund's one-year gain of 18.1% beat the MSCI ACWI Index.
ESG fund: Green Century Balanced
Holding roughly 60% of its assets in stocks of sustainable companies and 40% in green bonds makes the Green Century Balanced Fund (GCBLX) a good all-in-one option.
The firm is active in shareholder advocacy, engaging on behalf of a sister fund with Kraft Heinz (KHC), which recently committed to eliminating deforestation in its global supply chain by 2025, and Colgate-Palmolive (CL), which announced it would cut back its use of single-use plastic.
Avoiding energy firms hurt the fund in 2022. Its one-year gain of 4.5% lags a 9.1% gain in a composite benchmark of 60% S&P 500 and 40% Aggregate Bond Index.
ESG fund: Impax Global Environment Markets
The Impax Global Environmental Markets Fund (PGRNX) invests in foreign and U.S. companies that strive to reduce food waste or improve energy efficiency, water infrastructure or waste management.
During 2022, the managers prized stable earnings growth and an ability to pass on rising costs. Among the fund's top 10 holdings, for instance, Waste Management (WM) and Republic Services (RSG) have built-in rate increases to accommodate inflation. The fund's one-year return, 13.8%, beat its category peers but trailed the 14.0% return of the MSCI ACWI Index.
ESG Fund: Putnam Sustainable Future ETF
The Putnam Sustainable Future ETF (PFUT) homes in on "companies that will benefit from solving the problems of the world," says fund co-manager Katherine Collins. Many of the managers' picks are small and fast-growing, which adds an "extra element of reward and risk," she says.
The fund lost 33.7% in 2022, but so far this year it is up 16.8%. Gainers include Exact Sciences (EXAS), which makes at-home colorectal cancer screening kits; its stock climbed 34% over the past six months. Stock in engineering and construction firm Quanta Services (PWR) gained 30%.
Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
Nellie joined Kiplinger in August 2011 after a seven-year stint in Hong Kong. There, she worked for the Wall Street Journal Asia, where as lifestyle editor, she launched and edited Scene Asia, an online guide to food, wine, entertainment and the arts in Asia. Prior to that, she was an editor at Weekend Journal, the Friday lifestyle section of the Wall Street Journal Asia. Kiplinger isn't Nellie's first foray into personal finance: She has also worked at SmartMoney (rising from fact-checker to senior writer), and she was a senior editor at Money.
- Kim ClarkSenior Associate Editor, Kiplinger's Personal Finance
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