With headlines trumpeting a widespread retreat from efforts to advance certain environmental, social and corporate governance (ESG) goals, you might think that investors sticking with such values-based portfolios are falling far behind, too.
Wrong. Despite the backlash, most of the 15 stocks and five funds that Kiplinger has highlighted as ESG leaders have kept up with or beaten the broad market or their category peers over the past 12 months. Our portfolio of 15 stocks returned an average of 40.1% over the period, compared with 27.1% for the S&P 500. Ten of our 15 ESG stock picks outpaced the index. Of our favorite ESG funds, three outperformed their respective peer groups; two funds lagged, including our sole fixed-income fund.
Consider the backdrop to these solid showings. U.S. investors have pulled approximately $19 billion from ESG-focused mutual and exchange-traded funds (ETFs) in the year ending July 31, according to research firm Morningstar. And several major money managers, including Goldman Sachs Asset Management, J.P. Morgan and Nuveen, have quit a group that was coordinating large investors to pressure companies to reduce pollution.
Some regulators have also tapped the brakes on ESG efforts. The Securities and Exchange Commission (SEC) in April delayed a new rule requiring companies to publicly report their greenhouse gas emissions and climate-related risks. The stay was sparked by lawsuits challenging the rule filed by several Republican attorneys general. And a few high-profile companies, including Deere (DE), Tractor Supply (TSCO) and Harley-Davidson (HOG), have recently rescinded "diversity, equity and inclusion" human resources policies.
But veteran ESG analysts say the current challenges may, in the end, have a beneficial effect by clarifying which companies are truly committed to what some are now describing with less politically charged terms, such as "sustainability" or "transition (to alternative energy) investing."
"We want to invest in companies that will create sustainable value over time," says Robert Klaber, director of sustainability research and portfolio manager for Parnassus Investments. The best way to do that, he says, is to "ignore the noise" generated by political attacks on ESG and identify firms that have strong balance sheets and profit outlooks but are also taking actions relevant to their business that advance their long-term success. That might include, for example, reducing the risk of weather-related supply chain interruptions or developing human resource practices that retain top employees.
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, 2024.
The Kiplinger ESG 20 at a glance
| Company | Symbol |
|---|---|
| First Solar | FSLR |
| Levi Strauss | LEVI |
| Microsoft | MSFT |
| Prologis | PLD |
| Xylem | XYL |
| Nvidia | NVDA |
| Novo Nordisk | NVO |
| Salesforce | CRM |
| Trane Technologies | TT |
| W.W. Grainger | GWW |
| Applied Materials | AMAT |
| Hilton Worldwide Holdings | HLT |
| CBRE Group | CBRE |
| Target | TGT |
| Accenture | ACN |
| 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 |
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Environmental steward: First Solar
First Solar (FSLR) is a U.S.-based producer of photovoltaic cells. Despite facing competition from low-cost Chinese manufacturers, First Solar's 2024 earnings per share are on pace to nearly double 2023 levels.
The company has benefited from federal rules promoting U.S. manufacturers, for example, with subsidies from the Inflation Reduction Act. Customers have already ordered all the panels the company can make through 2026.
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Environmental steward: Levi Strauss
Jeans maker Levi Strauss (LEVI) is the best-performing stock over the past year among our picks for environmental leaders, returning 43.5% through August 31. The company wins praise from environmentalists for efforts to reduce greenhouse gas emissions at its company-operated facilities and along its supply chain as well.
"They are moving further and faster than many competitors," says Rachel Kitchin, who specializes in climate-related issues in the fashion industry for Vancouver-based nonprofit Stand.Earth.
The consumer discretionary stock, however, took a tumble in June and could remain jumpy in the near term as investors sort out sales trends, with strong direct-to-consumer revenues contrasting with more-sluggish sales at retailers. Analyst Jim Duffy, from investment firm Stifel, remains bullish and says long-term investors can bet on Levi's strong brand.
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Environmental steward: Microsoft
One of the so-called Magnificent 7 stocks that dominated the market for much of 2024, Microsoft (MSFT), is up 28.2% over the past year. It continues to be a darling on Wall Street thanks to its mix of software, artificial intelligence (AI) and cloud-computing businesses.
The company is also a leader in its use of alternative energy. Environmentalists appreciate actions such as the $10 billion contract Microsoft signed in May to develop renewable energy to power its computer banks.
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Environmental steward: Prologis
Prologis (PLD), a real estate investment trust (REIT) specializing in warehouses, notched the lowest return of our 15 ESG stock picks, gaining just 5.9% over the past year.
Still, analysts are generally positive, expecting that continuing growth in e-commerce will increase demand for the company's storage facilities. Prologis continues to reduce costs by mounting solar panels on its warehouse roofs.
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Environmental Steward: Xylem
Xylem (XYL), a leading producer of water-filtration equipment, makes the cut to be one of just 40 stocks in the Parnassus Mid Cap Fund (PARMX). In part, says Klaber, that's because new federal rules setting caps on "forever" chemicals, such as PFAS in drinking water, should boost demand for Xylem's water-cleaning products and services for at least the next three years.
The industrial stock is up 34.2% over the past 12 months, ahead of the S&P 500.
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Social standout: Nvidia
Nvidia (NVDA) is by far the biggest winner by far among the Kiplinger ESG 20. Stock in the artificial-intelligence chip designer nosedived in August as investors began to view the AI boom more skeptically. But the stock still returned 141.9% over the past year.
A slight slowing in sales-growth momentum shows that Nvidia is "transitioning from a crazy growth story to simply a marvelous growth story," says Paul Meeks, chief investment officer of Harvest Investment Management. He's watching for pullbacks and says he'll add the stock to client portfolios at prices below $100.
Meanwhile, Nvidia has one of the lowest employee turnover rates in the tech industry, in part because of perks such as up to 22 weeks of paid parental leave.
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Social standout: Novo Nordisk
Novo Nordisk (NVO) is another outperformer. Stock in the Danish drugmaker has returned 51.5% over the past year, in large part because of its new anti-obesity medications. Providing many free or low-cost drugs to low-income patients globally makes Novo a social standout.
Most Wall Street analysts who cover the healthcare stock say it is still a good buy, as they expect profits to increase by at least 22% annualized for the next three to five years.
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Social Standout: Salesforce
Salesforce (CRM) is a social leader in part because it offers free software to nonprofits. It also has a loyal and growing customer base for its business-management software.
Noting that Salesforce retains more than 90% of its customers from year to year and is rolling out AI programs to help businesses increase sales, Morningstar analyst Dan Romanoff calls the company "one of the best long-term investment opportunities in software." The blue chip stock returned 14.6% over the past 12 months.
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Social standout: Trane Technologies
Trane Technologies (TT) is one of two social standouts that have performed so well lately that some analysts say their shares appear to have overshot fair value. That doesn't mean they should be jettisoned from your portfolio, and we're keeping them on our roster. But investors who are rebalancing portfolio assets or searching for places to skim outsized profits might look here.
TT returned 77.4% in the past year, in part because climate change is strengthening demand for its heating and air conditioning equipment. Trane wins plaudits for its safety record and benefits – such as paying tuition benefits for its workers up front, instead of requiring them to wait for reimbursement.
As for its valuation, CFRA analyst Jonathan Sakraida suggests that investors looking to buy wait for dips below $330 a share.
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Social Standout: W.W. Grainger
Industrial supplier W.W. Grainger (GWW) is the second standout that has done so well on the price charts that some analysts are concerned about valuation. Indeed, GWW, which is ranked as a "best place to work" by several organizations, has gained 39% in the past year. That rise has made the stock look pricey, say several analysts.
RBC Capital Markets analyst Deane Dray, who refers to the company as the "Marines of industrial distribution" because of its disciplined execution, says that given Grainger's run-up, the stock is unlikely to outperform the market for now.
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Governance Leader: Applied Materials
Within our governance group, semiconductor equipment manufacturer Applied Materials (AMAT) has the highest percentage of bulls among analysts who follow the stock, which returned 30.1% over the past year.
The semiconductor stock is at risk from escalating trade tensions with China, but analysts at investment firm William Blair note that the most recent quarterly report showed China's contribution to the firm's revenues fell to 32% from 43% in the previous quarter.
Applied Materials scores points with corporate governance watchdogs in part because chief executive pay is aligned with the interests of long-term shareholders, with more than 70% of CEO compensation tied to achieving certain profitability and total-shareholder-return goals over a three-year time frame.
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Governance leaders: Hilton Worldwide Holdings
Hilton Worldwide Holdings (HLT) is one of two stocks in our governance leaders category whose recent stock-price gains have made many analysts who follow them cautious about continued big gains in the near future, but they note long-term bullish underpinnings. Indeed, the stock has returned 48.2% over the past year
Morningstar analyst Dan Wasiolek, for instance, notes that Hilton has the most loyal customers in the industry. And because most of its customers book directly with Hilton, the company has higher profit margins than competitors that rely more on booking sites.
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Governance leaders: CBRE Group
Real estate services company CBRE Group (CBRE) is the second outperforming governance leader that has some analysts concerned about valuation, up 35.4% over the past year.
The company has a strong and steady profit stream, says Morgan Stanley analyst Ronald Kamdem. Its mortgage-servicing and property-management lines should help boost earnings per share by 18% annualized over the next two years, he believes. But he advises new investors to wait for dips below $105 to buy the stock.
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Governance leaders: Target
Shares of big-box retailer Target (TGT) struggled in 2022 and much of 2023, but they started rebounding late last year and have notched a 24.9% gain over the past 12 months. Cheryl Smith, portfolio manager of the Green Century Balanced Fund, expects more gains, bolstered by sales of Target's private-label goods, which are expanding profit margins at the retailer.
Governance monitor ISS STOXX, formerly Institutional Shareholder Services, gives Target top marks for shareholder rights – including its one share, one vote policy, at a time when dual share classes and unequal voting rights are on the rise.
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Governance leaders: Accenture
The worst-performing stock in the governance group was consulting firm Accenture (ACN). We added it to our list six months ago, in part because of its strong ethics policies. The stock lost 8.8% over the past six months; it is up 7.2% over the past year.
Lance Garrison, a portfolio manager of the ESG-friendly Calvert Equity Fund, says he remains invested because Accenture has been "a good business through up cycles and down cycles" that is strengthened by its attention to ESG factors such as leadership diversity. It's "one of the best-run companies in the industry and an excellent earnings compounder," he says.
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ESG fund: Brown Advisory Sustainable Bond Fund
We're watching the Brown Advisory Sustainable Bond Fund (BASBX). Up 6.6% over the past year, it has lagged the Bloomberg U.S. Aggregate Bond index (up 7.3%).
There's still much to commend the fund: It beat the Agg in 2018, 2019 and 2020, and held up well in 2022. Plus, Sustainable Bond stands out with a portfolio packed with companies sporting low-to-negligible ESG risk. But it has struggled since 2023, when the managers lightened up on corporate debt to position the fund more defensively. The fund yields 4.6%.
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ESG fund: FlexShares STOXX Global ESG Select Index ETF
The FlexShares STOXX Global ESG Select Index ETF (ESGG) tracks an index of U.S. and foreign ESG companies that comply with the U.N. Global Compact principles of behavior covering human rights, labor, the environment and anti-corruption.
Top holdings include Dow Jones stocks Apple (AAPL), Microsoft and Amazon.com (AMZN). Over the past year, it gained 23.4%, which outpaced 65% of its peers (global large-cap stock funds).
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ESG fund: Green Century Balanced Fund
The managers of the Green Century Balanced Fund (GCBLX), an all-in-one fund of roughly 60% stocks and 40% bonds and cash, invest in stocks that pass strict ESG criteria.
And the fund firm actively engages companies. It played a key role, for instance, in Apple's new-ish policy that allows customers to independently repair select iPhones and other products, thereby reducing electronic waste. The fund's 16.6% one-year return beat the typical moderate allocation fund.
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ESG fund: Impax Global Environment Markets Fund
The environmentally focused Impax Global Environmental Markets Fund (PGRNX) invests in foreign and U.S. companies that strive to reduce food waste, increase energy efficiency or improve water infrastructure.
Among the fund's top holdings are Waste Management (WM) and American Water Works (AWK). Over the past 12 months, the fund returned 20.0%, lagging the MSCI All-Country World index (up 23.4%).
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ESG Fund: Putnam Sustainable Future ETF
Only companies with solutions to the world's social, environmental and economic development problems will find a home at the Putnam Sustainable Future ETF (PFUT). A top holding, for example, is waste-management firm Casella Waste Systems. In 2022, Casella recycled 1.213 million tons of waste (such as household and food waste, mattresses, and tires), and it aims to recycle 2 million tons in 2030.
The fund's 77-stock portfolio is heavy in tech and healthcare relative to other mid-cap growth funds. And its 12-month, 25.8% return beat 89% of its peers.
Learn more about PFUT at the Putnam Investments provider site.
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.
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