Inclusive corporate hiring, better governance and a cleaner corporate footprint — ESG investing goals — surely benefit everyone. Right?
Not so fast. Rising scrutiny over greenwashing and companies' ESG reporting pose headwinds to maturing environmental, social and governance efforts. A struggling 2022 stock market hasn't helped.
And yet researchers predict ESG investing will more than double in the next three years, as more investors align their portfolios with their principles. ESG assets will account for 15% of U.S. and U.K. investments by 2025, according to a Dow Jones' survey of investing professionals.
"Companies that fail to quickly recognize the shifting appetite for corporate action on climate are going to be at the risk of investors potentially diverting assets," Ricardo Aceves, head of ESG and impact investing research at Dow Jones, told IBD.
Finding the best ESG companies requires study.
Investor's Business Daily can help. We've compiled our fourth annual ESG Investing special report. Public companies that made our 2022 100 Best ESG Companies list combine high Dow Jones sustainability scores with superior IBD technical and fundamental stock ratings. They are standouts for ESG investing.
Best ESG Companies: Meet The Top 3
Topping the list this year is Worthington Industries. J.B. Hunt Transport Services took second place. And rounding out the top three is data analytics provider Verisk Analytics. All 100 companies on our 2022 list ranked in the top 15% of Dow Jones ESG scores and had an IBD Composite Rating of 81 or better (on a scale of 1 to 99), as of Aug. 31. To check current stock ratings and charts visit IBD's Stock Checkup page.
Technology behemoths Texas Instruments and Apple finished fourth and fifth respectively on this year's IBD Best ESG Companies list.
ESG Investing Remains Popular In Bear Market
Making money in a bear market requires fortitude and thoughtful study. And when times get tough, paying potentially higher fees for an ESG mutual fund or ETF — that may lag in performance versus other investments — may not make sense to investors.
Thus ESG funds saw their first outflows in five years during 2022's second quarter. U.S. sustainable funds dropped $1.6 billion during that time frame, according to Morningstar research.
Equity funds in clean energy and climate technology got hit hard. However, increased volatility in the energy markets due to the war in Ukraine, soaring gas prices and rampant inflation took a bite out of every equity fund sector.
And the stock market pullback didn't snuff out ESG investing. Sustainable fund flows rebounded in August, with inflows of $1 billion. And more than two-thirds of Americans (77%) believe it's important to invest in companies that align with their personal values, according to an IBD/TIPP Poll in September 2022.
"Despite periods of poor performance, increased scrutiny and pushback from thought leaders and politicians, we've seen that investors in sustainable funds are continuing to invest," said Alyssa Stankiewicz, Morningstar's associate director of sustainability research. "Investors are buying into these funds because they are aligned with their values."
And Dow Jones — IBD's parent company — says investment managers in the U.S. will increase the percentage of ESG-related investments in their portfolios substantially in the next couple of years. By 2025, 11% to 15% of U.S. managers will put 40% of their portfolios in ESG investments.
Energy Stocks Dominated In 2022
Businesses participating in the energy transition were well represented on this year's Best ESG Companies list. Solar panel manufacturer First Solar took the top spot on IBD's energy category list and ranked sixth on the overall top 100 list. ConocoPhillips (7 overall), Cheniere Energy (11), Sempra (13), Chevron (14), and Marathon Petroleum (15) all ranked in the top 15 of IBD's 2022 Best ESG Companies list.
"Oil and gas companies and power generators are at a pivotal point when it comes to transitioning toward greener forms of energy," Aceves said.
Under increased regulatory and investor pressure, companies have adopted ambitious climate targets, Aceves says. More than 5,000 businesses voluntarily pledged to meet net-zero carbon targets at the U.N. Climate Summit (COP26) in Glasgow last November.
Roughly one-third of the world's largest publicly traded companies have now committed to emissions targets, according to Net Zero Tracker.
Top-ranked Worthington Industries joined the list of firms adopting net-zero emissions plans this year. Aiding that effort, in June 2021 it created a Sustainable Energy Solutions business segment focused on the development of green hydrogen and natural gas fuel sources.
"From a growth perspective, we have a sustainability mindset," Worthington's vice president of corporate communications, Sonya Higginbotham, told IBD. "(As an ESG company), we've identified our ability to make a better impact on the world through our products and services."
Read The Rest Of Our Comprehensive ESG Investing Special Report:
- List Of IBD's 100 Best ESG Companies for 2022, including ranking methodology
- Best ESG Companies in eight industries
- Q&A with Ricardo Aceves, ESG research head at Dow Jones
- Worthington Industries ESG profile
- Verisk ESG profile
- First Solar ESG profile
- Apple ESG profile
Climate Is An Increasing Concern For Investors
Environmental concerns have heated up. Dow Jones says investors are now more attentive to companies' environmental efforts than social justice programs.
That's not surprising. Nearly two-thirds of Americans say they've experienced extreme weather events over the last year, according to an August survey from Pew Research.
Plus, investors worry how physical risks posed by climate events will impact investments. "Capital providers are increasingly recognizing that a company's financial performance, risk profile and longevity are closely tied to proper management of sustainability issues," Aceves said.
Rising shareholder expectations around climate issues are gradually transferring to the boardroom. More corporate directors say ESG is a growing part of risk management discussions, according to a PricewaterhouseCoopers (PwC) survey.
However, almost half of those corporate directors still didn't see how ESG issues affected their company's bottom line, reports PwC.
Support For Specific ESG Measures Mixed
Investors see ESG progress. Roughly 57% say they're satisfied with corporate ESG efforts to reduce environmental impacts, according to the IBD/TIPP poll conducted Sept. 7-9, 2022.
Corporate ethics and economic development initiatives gained investor support in 2022. But fair wage issues and diversity and inclusion efforts appeared to lose favor this year among investors, relative to investment returns.
Yet, shareholder pressure to examine corporate racial justice rose. Proposals pushing for civil rights audits were approved by shareholders at Apple, Johnson & Johnson, Waste Management and Altria Group this year.
Rise Of The Anti-ESG Movement
ESG investing detractors disparage these types of resolutions. They say activist shareholders are pushing politics over profits. Strive Capital's Vivek Ramaswamy, who is backed by Peter Thiel and Bill Ackman, says using ESG funds to push socially motivated agendas is "green smuggling."
"Companies should focus on exclusively making great products and services for customers, and yes doing so for profit, while leaving politics to the politicians," Ramaswamy said at the Marketwach Best New Ideas In Money Festival in New York in September. (MarketWatch is a sister company of IBD.)
These sentiments underpin an emerging anti-ESG movement. It has thrust sustainable investing into the political culture wars. Some conservative leaders are championing legislation that limits the use of ESG considerations in state investment strategies.
Florida recently joined the anti-ESG push. Gov. Ron DeSantis and the State Board of Administration approved a measure prohibiting the use of ESG factors in investment decisions. And in 2021, Texas legislators passed a bill banning municipalities from doing business with banks that limited investments in fossil fuels and firearms.
Greenwashing Draws Regulator Scrutiny
"ESG is a scam. It has been weaponized by phony social justice warriors," Elon Musk tweeted in May. That statement came after Tesla was booted from the S&P 500 ESG index over concerns about worker conditions in its factories and the company's carbon impact.
S&P Global's move caused confusion. How can the world's most popular EV maker not qualify as a top ESG company?
The incident captures the ongoing debate about what exactly constitutes ESG investing. The lack of uniformity and application of sustainability metrics cast doubt over ESG. Is ESG a force for change or simply "greenwashing?" Companies are engaging in greenwashing when they try to make a product or activity appear more environmentally friendly than it actually is.
The Securities and Exchange Commission has decided to weigh in. Earlier this year, the agency initiated an investigation into Goldman Sachs and its management of ESG funds. And regulators have outlined several proposals for more stringent disclosure and transparency requirements on ESG efforts by companies and fund managers.
Risk Vs. Impact: Assessing The Best ESG Companies
Despite headwinds, ESG investing is here to stay. And as regulators bring more clarity to ESG products, investors will begin to exert more control over where they want to be on the sustainable investing spectrum.
"Given the amount of dollars at stake and the amount of interest in this space, I (believe) there will be a lot of solutions offered," NDVR Wealth's Roni Israelov said of socially responsible investing strategies. NDVR has teamed up with the nonprofit As You Sow to provide custom portfolios for high-wealth investors interested in ESG. "The market is big enough for a number of different solutions," Israelov said.
Follow Alexis Garcia on Twitter @IBD_Alexis for business news and more.
