It has been a challenging run for ESG investing, or investing with an eye toward environmental, social and corporate governance issues. After years of booming growth, U.S. investors in 2022 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, 2023, 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 in 2023, 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) in March adopted new rules to standardize ESG-related data so that investors can better compare options. The rules will require companies to post information on climate risks they face. However, implementation is currently on hold amid legal challenges.
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.
First Solar (FSLR), a U.S.-based photovoltaic cell maker, has averaged a three-year annualized return of 30.4%, and analysts expect continued growth thanks to federal green-energy subsidies.
The shares suffered a setback last 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.
Jeans maker Levi Strauss (LEVI) plunged 36.5% in 2022, but stabilized in 2023 and is up nearly 26% in 2024 through April 17. Stifel analyst Jim Duffy thinks this uptrend will continue 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.
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.
Real estate investment trusts (REITs) have had a tough stretch, 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.
Shares of Xylem (XYL), a manufacturer of water equipment, such as pumps, filters and treatment systems, nearly matched the S&P 500's 23% 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.
Nvidia (NVDA), the designer of video game and artificial intelligence chips, is one of the best-performing stocks in the Kiplinger ESG 20. And Wall Street analysts overwhelmingly think there is more room to run, as they project a 35% 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.
We added Danish pharmaceutical giant Novo Nordisk (NVO) to the Kiplinger ESG 20 in 2023 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 37 times expected earnings, the stock is a good one to pounce on when the market dips.
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.
Shares of Trane Technologies (TT), a maker of heating, ventilation and air-conditioning equipment, has returned more than 68% 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.
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 45% 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.
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 24 of 36 recommending the shares as a Buy or Strong Buy.
Parnassus's Choi, whose fund owns the stock, appreciates the chipmaker's independent and knowledgeable board of directors.
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.
Accenture (ACN) replaces Clorox (CLX) in the ESG 20. It still wins plaudits for pro-shareholder governance policies such as an independent board of directors. But last fall, Clorox suffered a devastating cyber-attack, which is a governance setback, as well as a reason the company expects sales to decline for the fiscal year ending June 30. Of the 22 analysts who follow the stock, only two recommend Clorox. The company has struggled to forge a new path to growth as a pandemic-fueled surge has faded.
In its place we recommend Accenture, a global consulting company considered a leader in corporate governance. ISS ESG, the sustainable-investment arm of ISS STOXX, praises the gender diversity of the board and a policy requiring board members to be reelected each year. The firm has received cybersecurity certifications and awards from several entities, including the International Organization for Standardization, a group of 164 national organizations that set standards for various aspects of corporate operations.
Of the 29 Wall Street analysts who follow Accenture, 18 expect it to outperform the broad stock market. Because Accenture is a tech consultant but not a tech company, investors benefit from the growth of artificial intelligence and other new technologies while avoiding much of the tech industry's volatility, says J.P. Morgan analyst Tien-tsin Huang. Long-term contracts with companies and government agencies around the world produce a steady cash flow, which is an attractive defensive quality, he adds.
Hotel company Hilton (HLT) returned nearly 39% 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.
Target (TGT) is one of the ESG 20's worst-performing stocks on a year-over-year basis, with the retailer up just 4.5%. 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.
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. In recent years, 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 1.7% over the past year, lagging the Bloomberg U.S. Aggregate Bond Index. The fund yields 4.0%.
Learn more about BASBX at the Brown Advisory provider site.
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 17.8% beat the MSCI ACWI Index.
Learn more about ESGG at the FlexShares provider site.
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, but it stabilized in 2023. Its one-year gain of 8.6% lags a 12.2% gain in a composite benchmark of 60% S&P 500 and 40% Aggregate Bond Index.
Learn more about GCBLX at the Green Century provider site.
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.
In recent years, the managers have 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, 8.8%, beat its category peers but trailed the 16.0% return of the MSCI ACWI Index.
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 gained 30% in 2023. So far this year, PFUT is up roughly 5%. Top gainers include glucose monitoring firm DexCom (DXC), which is up 66% in the past six months. Stock in burrito chain Chipotle (CMG) is up 59% in that same time frame.
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.
