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All Contents © 2019The Kiplinger Washington Editors
By Will Ashworth
| July 25, 2018
Warren Buffett’s grandson Howard is a Columbia University professor. He’s also a big believer in businesses creating social value by collaborating rather than competing with each other. Socially responsible investments, suggests the younger Buffett, are the way of the future.
“Truly, business interests and societal interests can be one and the same,” Howard Buffett wrote in a May 31 contribution to Harvard Business Review. “We see this in our research at Columbia University and have identified many examples where CEOs benefit their businesses by partnering across sectors with public officials, nonprofit managers, and community members.”
Buffett calls this kind of collaboration Social Value Investing, and he’s so committed to the idea that he’s written a book by this very title promoting the idea that if companies want to thrive in the future, they’ve got to deliver products and services that are more equitable and sustainable.
It’s an idea that BlackRock (BLK) CEO Larry Fink also supports, arguing that companies should deliver more than just profits. Shareholders are not the only stakeholders; companies must also make a positive contribution to society.
Socially responsible investments make investors wealthy while doing good at the same time. And these seven stocks do it better than most.
Prices and data are from the original InvestorPlace story published on July 13. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
If I’m going to write about seven socially responsible investments to own now, I can’t think of a better first pick than the iShares MSCI USA ESG Select ETF (SUSA), which is a group of 114 U.S. companies weighted not by market cap but by their environmental, social and governance rating.
Former InvestorPlace executive editor Jeff Reeves made an excellent point about the ETF in March 2018, singling out Ecolab (ECL) as an example of an S&P 500 company whose ESG ranking put it in the top five stocks held by SUSA despite being the 170th largest company by market cap.
If you agree with Howard Buffett and Larry Fink about the part companies should and could play in the world, SUSA is the easiest and fastest way to invest in socially responsible companies.
I would have preferred Apple (AAPL) over Microsoft (MSFT). However, because MSFT has a 5.23% weighting in SUSA, more than 100 basis points higher than AAPL, and this is strictly about the most socially responsible stocks in each sector, Seattle wins the day over Cupertino.
Every October, Microsoft releases its annual Corporate Social Responsibility report, parts of which are in CEO Satya Nadella’s yearly letter to shareholders.
Microsoft donates software and cloud services worth in the billions to those in need both in America and around the world, harnessing its many capabilities for the greater good.
“As a multinational corporation, we have both a substantial opportunity and a high responsibility to ensure that technology’s benefits reach people more broadly across our global society and economy,” Nadella wrote in the company’s 2017 annual report. “Everywhere we operate, we focus on contributing to local communities in positive ways — helping to spark growth, competitiveness and economic opportunity for all.”
It sounds to me like the CEO learned a thing or two from Bill Gates.
And it’s hard to deny the growth it’s experiencing in the cloud.
Just as Jeff Reeves mentioned, Ecolab punches above its weight — ECL is the second-largest holding in SUSA behind MSFT and ahead of AAPL despite having a market cap that’s just 4% as big — and for good reason.
The company’s DNA is entirely about making the world a better place.
“Sustainability is core to our business strategy. We deliver sustainable solutions that help companies around the world achieve business results while minimizing environmental and social impact,” stated Ecolab’s 2017 annual report. “The work we do matters, and the way we do it matters to our employees, customers, investors and the communities in which we and our customers operate.”
Those might sound like words of a PR firm, but the goals it has set for itself and its customers will go a long way to ensuring the world’s survival.
Between now and 2030, Ecolab’s goal is to conserve 300 billion gallons of water each year at its facilities and those of its customers. It didn’t quite make it in 2017, helping its customers conserve 171 billion gallons of water — the amount of water needed year for 587 million people. If you’ve read anything about how Las Vegas is soon going to run out of water, you know this is a big deal.
You can invest in a cigarette company, or you can invest in Ecolab. I’ll take Ecolab every day of the week and twice on Sundays.
Leading the industrials sector is 3M (MMM), a company whose stock has taken it on the chin so far in 2018, down 14% year-to-date through July 11.
What has gone wrong at the company known for Scotch tape, Post-it notes and many other products we use on a daily basis?
Simply put, investors aren’t happy with its pace of growth. In April, MMM cut its organic growth projection by 100 basis points to 3.5%, knocking its stock for a significant decline.
It’s fighting the same thing Microsoft faced when Steve Ballmer was CEO — a lack of growth drivers.
“The knock against 3M is that they are so big it’s hard for them to maintain a higher growth rate,” said Morningstar analyst analyst Joshua Aguilar. He added that the company needs a new product to sell across different groups in its portfolio.
To do just that, 3M has upped the amount it spends annually on R&D by 50 basis points to 6% of revenue.
Also, suggests new CEO Mike Roman — he took over July 1 — it will buy companies where it feels they can add to the company’s strengths.
In my opinion, 3M has always been a company on the leading edge of innovation whether it be developing new products or being socially responsible.
I liked it in April near $220. I like it even more around $200.
There is an element of society that believes doing well by doing good is a bunch of nonsense. BlackRock CEO Larry Fink isn’t one of them.
Every year, Fink puts out his annual letter to CEOs, and every year there’s a call to action.
Here’s an excerpt from his 2018 letter:
“Society increasingly is turning to the private sector and asking that companies respond to broader societal challenges. Indeed, the public expectations of your company have never been greater,” Fink wrote in his 2018 letter, A Sense of Purpose. “Society is demanding that companies, both public and private, serve a social purpose.”
And here’s an excerpt from a year earlier:
“Environmental, social, and governance (ESG) factors relevant to a company’s business can provide essential insights into management effectiveness and thus a company’s long-term prospects,” wrote Fink in his 2017 letter to CEOs. “A global company needs to be local in every single one of its markets.”
As the world’s largest asset manager I believe BlackRock needs to do more than it’s doing as the custodian of such much of the world’s wealth. Clearly, Fink takes the company’s role as an asset manager seriously. BlackRock can do more, and I believe they will.
If you’re going to own a financial services stock, why not own one that believes it has a social responsibility beyond making money for shareholders?
Averaging an annualized total return of 12.6% over the past ten years, it must be doing something right.
I know what you’re thinking: How can a luxury jewelry retailer be socially responsible?
It’s a fair question. Here’s my answer.
It’s easy to be skeptical about any luxury brand’s commitment to being socially responsible given they sell products that cost as much as some people earn in an entire year.
However, if you put on your contrarian hat for a moment, I think you’ll see it’s vitally important for companies like Tiffany (TIF) to lead the way.
“Our task is bigger than that of any one company or any one industry. The business community must exercise the full strength of its voice to advocate for the protection of this planet’s natural resources and for action that will lead to a stable climate,” stated Michael J. Kowalski, former Tiffany Chairman, in the company’s 2016 sustainability report. “This advocacy, coupled with long-term action, can demonstrate that the protection of the environment and a growing economy are not mutually exclusive.”
Tiffany sells diamonds. The least it can do is make sure they’re procured from safely operated mines. Not only that but it can support causes that are important to its customers that might not directly impact its own business but show a level of engagement beyond a mere transactional relationship.
According to a Tiffany employee survey, 87% are proud to work for the company, a surprising statistic considering the industry.
Perhaps the best statistic in its sustainability report: 60% of managers and above are women; three out of ten of its board of directors are women.
I expect to see more good works being performed by Tiffany in the years to come, and with them, good returns.
Kellogg (K) wouldn’t be my first choice amongst consumer defensive stocks — over the past decade it generated an annualized annual total return of 5.7%, about half its peers — but it still manages to grab the 11th largest weighting amongst SUSA’s 116 stocks.
It must be doing something right, although you could counter-argue it’s a prime example of why socially responsible investing doesn’t work. But I digress.
Kellogg is routinely named one of the world’s most ethical company’s. Earlier this year the Ethisphere Institute named it one of the 2018 World’s Most Ethical Companies, the 10th year it’s been named in the food, beverage and agriculture category.
As the world gets more complicated from a trading perspective and the bull market appears to be slowing, investors increasingly are reaching for consumer staples stocks that tend to do better in times of uncertainty.
As a result, Kellogg’s stock is up 14% in the last three months including around 8% in the past month alone.
Regression to the mean along with operating margins that are higher than they’ve been since 2013 suggests the remainder of 2018 and into 2019 should be good for Kellogg shareholders.
This article is from Will Ashworth of InvestorPlace. As of this writing, Ashworth did not personally hold a position in any of the aforementioned securities.
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