Investing

ESG Investing: How to Pick "Good" Stocks to Buy

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What if instead of causing stress and confusing you, investing made you feel warm and fuzzy inside?

What if you could buy a stock and know you were investing in a business that was making the world a better place?

This is where ESG investing comes in.

The ESG approach looks at the impact a business has on its community, stakeholders, and the environment to focus on companies that do good in addition to performing well.

Before we learn how to find high ESG stocks, let’s dive into the three components that make up this investing strategy.

E is for environmental
The environmental component evaluates a company’s impact on our home planet. For example, is the company actively reducing its carbon footprint? Does it design its products to be reused and safely dispose of hazardous byproducts? A leader in the E factor might produce renewable energy or make electric cars.

S is for social
The social component consists of people-related elements like culture and issues that impact employees, customers, suppliers, distributors, communities, and society. A leader in the S factor prioritizes diversity and inclusion, ensures ethical sourcing throughout its supply chain, and participates in social justice issues that matter to its stakeholders including marriage equality and minimum wage law.

G is for corporate governance
The corporate governance component relates to the board of directors, company oversight, management’s attitude toward shareholders, and how corporate incentives align with the business’s success. A leader in the G factor has a diverse and independent board, executive compensation and benefits based on long-term business performance metrics, and a good relationship with regulators.

What’s the difference between ESG and Socially Responsible Investing?

You may know about SRI, in which investors exclude unpalatable industries like weapons, gambling, and alcohol. ESG instead takes an opt-in approach so investors buy stocks of businesses with impressive ESG attributes, rather than avoiding those that don’t.

I’m sure you’re thinking: ‘Sounds great, but it also sounds like ESG filters out a lot of companies. Is ESG investing a way to beat the market?’

ROIC is one of the primary drivers of enterprise value and stock-price performance. It measures how efficient management is at allocating money. ROIC can be applied across industries, making it a powerful tool for investors looking for shining examples of high ESG companies across sectors to create a well-rounded portfolio. JUST Capital found its highest quintile of ESG companies have 4.5% higher ROIC than the bottom-quintile companies.

Even Wall Street is coming around. Morgan Stanley said, “An ESG focus has become essential for long-term compounding.”

Anyone can integrate ESG analysis into their existing investment strategy. Forget marketing and charitable donations, ESG goes deeper by measuring how a company’s purpose drives its profit, and how that purpose relates to ESG factors.

It’s easy to talk the talk, but which corporations are walking the walk, and how can you tell the difference? Look for things like:

● Sustainability reports: High ESG companies publish these annually to update investors on their progress on meeting ESG targets, how much money they’re reinvesting into ESG issues, and ROIC.
● Inclusion on the Dow Jones Sustainability Indices and other ESG lists.
● You can also find ESG info in the research sections of your online brokerage or in company filings.

Once you’re satisfied with a stock’s ESG elements, you aren’t ready to buy yet. The second step is to evaluate the financials by answering these questions:

1.Does the company have a healthy balance sheet?
2.Can the business generate growing free cash flow and organic revenue growth?

What does a strong ESG stock look like? Let’s put it all together by looking at a Fool favorite, salesforce.com. Added to the Dow Jones Sustainability Index in 2018, salesforce.com is an example of an exemplary ESG leader in tech.

The company’s ESG efforts are detailed in its Stakeholder Impact Report:

The easiest way to find high ESG companies is to look for those with a single-minded mission to improve the world. Beyond Meat’s Executive Chairman Seth Goldman said, “Investment returns are never guaranteed, but by investing in line with my values, I know I won’t regret my choices.”

Increasingly, investors are starting to feel the same way.

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7 Comments
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Robert Dunfee

7 Comments

  1. Tom Campbell
    July 14, 2021 at 7:33 pm

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  2. Cameron McGill
    July 14, 2021 at 7:33 pm

    Participates in Social justice issues? So like Gillette? 😂

  3. Investing Education
    July 14, 2021 at 7:33 pm

    good video but the number 1 characteristic i look for in companies is MOAT

  4. GenExDividendInvestor
    July 14, 2021 at 7:33 pm

    Thanks. The various investment approaches for a portfolio are interesting.. ESG seems that it is more about economics and SRI seems to be more about social concerns/ethics.

  5. MARK TALKS MONEY
    July 14, 2021 at 7:33 pm

    Remember a growing company and a good stock to buy are not always the same.

  6. metta8
    July 14, 2021 at 7:33 pm

    BEP Brookfield Renewable Partners
    NEE NextEra Energy

  7. AL SA
    July 14, 2021 at 7:33 pm

    Means nothing to me, if ain't making me money.