Kiplinger ESG 20: ESG Stocks Not Immune From Downturn

After a bullish 2021 for stocks with impressive ESG credentials, a pullback is under way; our ESG picks also stumble.

A white rose wilts out of a white vase
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Market volatility early in 2022 hasn’t dragged down only growth stocks and blue-chip names. It has also had a brownout effect on the Kiplinger ESG 20 (opens in new tab), our list of favorite stocks and funds that excel at meeting environmental, social and corporate governance standards.

Companies lauded for planet-friendly products, treating their workers well and building diverse boards and management teams are not immune to headwinds such as rising interest rates, spiking inflation, supply chain disruptions, computer chip shortages and the uncertainties of war. But short-term hiccups for companies committed to long-term sustainability shouldn’t deter investors, says Peter Essele, head of portfolio management for Commonwealth Financial Network.

“An ESG investing framework is well suited for the economy of the future,” he says.

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After a bullish 2021 for ESG picks with impressive credentials, a pullback is under way early in 2022. Among our favorite ESG stocks, only cereal maker Kellogg (K (opens in new tab)), which settled a strike with workers in December by offering better pay and benefits, and consumer electronics retailer Best Buy (BBY (opens in new tab)) have posted a positive return so far this year. (Prices and returns are through March 4.)

Overall, our 15 ESG stocks have tumbled 13.3% since the start of the year, compared with a loss of 8.9% for the S&P 500.

The hardest-hit ESG stocks on our list are water technology company Xylem (XYL (opens in new tab)), down 28.7% in 2022, and Trane Technologies (TT (opens in new tab)), which makes energy-efficient heating and cooling systems, off 24.8%.

Our 15 ESG favorites have edged the broad market over the past 12 months, however, gaining 16.8% compared with the S&P 500’s 16.5% advance. And our picks still hold a performance edge over the broad market in the latest three-year period (25.4% versus 17.7%).

Common Complaints

The weak recent performance of our ESG picks is due to the well-known market depressants that have made headlines.

Vestas Wind Systems (VWDRY (opens in new tab)), which makes turbines that turn wind energy into electricity, has been hurt by higher costs for materials and shipping due to supply-chain disruptions. Xylem has been impaired by computer chip constraints, which reduced the number of water meters it could ship to customers. Economy-wide bottlenecks and ingredient shortages have made it harder for Kellogg to get enough boxes of Frosted Flakes and Froot Loops on store shelves.

Like other growth-oriented stocks that tend to struggle when interest rates are rising, those on our list – such as solar panel maker First Solar (FSLR (opens in new tab)), chipmaker Nvidia (NVDA (opens in new tab)) and Salesforce.com (CRM (opens in new tab)), a giant in the cloud-based software market – have been buffeted by the Federal Reserve’s commitment to hike rates to fight the hottest inflation readings in 40 years. Higher interest rates eat into the value of a company’s future earnings, making stocks whose promise is largely future-loaded less attractive.

Our ESG-focused funds have posted mixed results. Brown Advisory Sustainable Bond Fund’s (BASBX (opens in new tab)) 2.8% decline so far in 2022 was smaller than the 3.1% loss suffered by the Bloomberg U.S. Aggregate Bond index. The fund also topped that market benchmark in the past one- and three-year periods. FlexShares Stoxx Global ESG Select Index ETF’s (ESGG (opens in new tab)) one-year return of 9.0% and three-year return of 14.6% topped the MSCI All Country World index in both periods, although it has lagged slightly for the year to date.

The biggest fund losers so far in 2022 are Pax Global Environmental Markets (PGRNX (opens in new tab)), which owns foreign and U.S. stocks, down 18.4%, and Putnam Sustainable Future ETF (PFUT (opens in new tab)), which owns significant stakes in the technology and healthcare sectors, down 19.0%.

Contributing Writer