6 Steps to Build an Ethical ESG Investment Portfolio

ESG & Ethical Investing is Huge But Can Be Complex. We Do The Work For You & Show You How to Research, Create & Manage an ESG Portfolio For 2020 & Beyond

If you care about the environment and the state of the planet, you are probably already taking steps to try and reduce your impact on the world.  Perhaps like me, you have an electric or hybrid car, you are reducing your use of plastics, you recycle and are eating more vegetarian or even vegan dishes.

But there is even more, you can do to help promote and encourage more companies to adopt better Environmental, Social and Governance (ESG) best practices. You can put your money to work in companies that have solid ESG policies.

What is ESG Investing?
What is ESG investing? Investing in Companies with a Good Track Record on Environment, Social & Governance

In this article, I show you how to start building a profitable ESG portfolio of stocks that you can invest in for the long-term.

6 Steps to Build an ESG Investment Portfolio

  1. Understand the Principles of ESG Investing
  2. Build a List of Highly-Rated ESG Companies
  3. Add Your ESG Companies to a Portfolio Mgt Tool
  4. Perform Fundamental Financial Research
  5. Select Your Investments & Purchase Stock
  6. Understand ESG Performance & Returns

1. ESG Investing Principles

ESG investing (Environmental, Social & Governance) enables ethical investors to channel their capital to companies that demonstrate environmental sustainability, social responsibility, and good corporate governance. ESG investing can be done by investing in specific companies or by investing in some of the new ESG funds.

EnvironmentSocialGovernance
Air QualityLabor PolicyExecutive Pay
Green EnergyCommunity ImpactEthical Practices
Waste MgtEqual EmploymentTransparency
Hazardous MaterialsEqual OpportunityAccounting & Taxes

Learn more about the detailed principles of ESG Investing

2. Build a List of Highly-Rated ESG Companies

In this section, I show you how to find stocks that are highly rated on various ESG metrics and later provide you a list of companies and their ratings.

Searching for Good ESG Companies

There are many firms that provide ESG ratings for specific public companies, but mostly you will need to pay for those services and the information does not come cheap.

Instead, you can use the ESG Rating Tool provided by the highly reputable investment research company MSCI. Or you can look up a stock on Yahoo Finance which has a feed from Sustainalytics

List of Highly-Rated ESG Companies

We have compiled a list with the help of Stock Rover of high performing companies with good ESG ratings from MSCI and Sustainalytics.

Stock Rover Top 20 ESG Stocks

TickerCompanyMSCI ESG ScoreMSCI ESG RatingSustainalytics Risk Score
NEENextEra EnergyAAALeaderHigh Risk
MMM3MAAALeaderHigh Risk
ECLEcolabAAALeaderHigh Risk
CRMSalesforce.comAAALeaderLow Risk
AAgilent TechnologiesAAALeaderLow Risk
NVDANVIDIAAAALeaderLow Risk
MSFTMicrosoftAAALeaderLow Risk
GOOGLAlphabetAALeaderMedium Risk
EWEdwards LifesciencesAALeaderMedium Risk
PGProcter & GambleAALeaderMedium Risk
HDHome DepotAALeaderLow Risk
BLKBlackRockAALeaderMedium Risk
VRTXVertex PharmaceuticalsAALeaderMedium Risk
GILDGilead SciencesAALeaderMedium Risk
MAMastercardAAverageLow Risk
VVisaAAverageLow Risk
AAPLAppleAAverageMedium Risk
INTCIntelAAverageLow Risk
JNJJohnson & JohnsonBBBAverageHigh Risk
DISWalt DisneyBBBAverageLow Risk

Jump to Section: Further Details & Research on these ESG Stocks

3. Add Your ESG Companies to a Portfolio Mgt Tool

Although ESG investing can be complicated, having to wade through the ethical dilemmas in order to emerge with a list of companies you want to invest in, it does not need to be.

The team over at Stock Rover, our review winning stock screener and portfolio management tool, has made ESG investing that much simpler by putting together an in-built portfolio of the best ESG companies in the USA.

The Stock Rover team handpicked the top 20 highest rated companies according to the Environmental, Social and Governance (ESG) Score.

The screenshot below shows the 20 best ESG companies and I have combined that with a view that shows the Stock Rover ratings, sorted on Overall Rating Score. This makes it easy to make your individual investments based on company valuation, growth or even financial strength.

ESG Investment Companies - Companies With Good ESG Scores
ESG Portfolio in Stock Rover – Companies With Good ESG Scores – Built into Stock Rover

The biggest benefits of using Stock Rover to manage your ESG investing portfolio are that you can track the historical performance of the portfolio and take advantage of the excellent Stock Rover rating system plus the Morningstar research they also provide.

5 Steps to Build Your ESG Portfolio

Sign up for a Stock Rover 30 day trial, or read the review first.

How to Create a Good ESG Investing Portfolio

5 Steps to Create a Good ESG Investing Portfolio with Stock Rover

  1. Sign in to Stock Rover and click on Library
  2. Select Portfolio
  3. Search for ESG
  4. Select “Import Top 20 ESG Companies”
  5. Select Import

Performing these steps will provide you the pre-populated list of the Top 20 ESG Stocks listed above.

There are other Stock Screening tools available, see our Stock Screener Review & Comparison.

4. Perform Fundamental Financial Research

Now it is time to perform your own research and as an ESG investor, you are probably investing for the mid to long-term. You might prefer to invest in growth stocks or for long-term value and dividend income.

Here I share 2 of our 7 best investing strategies. All 7 Investing Strategies are available here.

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Stock Rover ReviewAll the examples and research into this article were performed using our favorite stock screener Stock Rover which won our Best Value Investing Stock Screener Comparison.

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Fair Value & Margin of Safety Buffett Strategy

Fair Value & Margin of Safety Buffett Strategy Screening Criteria

  • Margin of Safety* > 20%
  • Fair Value* Higher Than Share Price
  • Yearly EPS growth YOY > 5%
  • Return on Equity (ROE) 0 > 15%
  • 10 Year ROIC Average* => 12%
  • Solvency Ratio > 20%
  • Earnings Yield > 3%
  • Dividend 5 Year Average % > 0%
  • Payout Ratio < 30%

*Exclusive to StockRover

Implement This Strategy Guide

Probably Buffett’s most important measure to decide whether to invest in a company the Margin of Safety is the percentage difference between a company’s Fair Value and its actual stock price. This metric is the single most significant valuation metric in our arsenal as it is the final output of detailed discounted cash flow analysis.

Fair Value Warren Buffett bases his Intrinsic Value / Fair Value calculations on future free cash flows. To explain, Buffett thinks cash is a company’s most important asset, so he tries to project how much future cash a business will generate and also discount it against inflation. This is called the Discounted Cashflow Method.

A Strong Earnings Per Share History & Growth Rate. It will come as no surprise that earnings per share (EPS) is a very important metric for Buffett and Wall Street.  Buffett looks for companies with a consistent track record of earnings growth, particularly over a 5 to 10 year period.

A Consistently High Return on Equity. This is a profitability measure calculated as net income as a percentage of shareholders’ equity, also called ROE. A high ROE shows an effective use of investor’s money to grow the value of the business.

Return on Invested Capital (ROIC), quantifies how well a company generates cash flow relative to the capital it has invested in its business.

Is the Company Conservatively Financed? The solvency ratio is a measure of whether a company generates enough cash to stay solvent. It is calculated by summing net income and depreciation and dividing by current liabilities and long term debt. A value above 20% is considered good.

If a company cannot make a profit per share higher than the return of a safe asset like treasury bonds, then you should not invest in it.  This is an easy calculation and we will use the Earnings Yield.  Earnings Yield is the earnings per share for the most recent 12-month period divided by the current market price per share.

The Warren Buffett Stock Screener - Completely Configured
The Warren Buffett Stock Screener Strategy Results

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Value + Dividend Strategy

Value + Dividend Strategy Screening Criteria

  • Dividend Yield > 2
  • Dividend 5 Year Average > 1%
  • EPS 5 Year Avg > 8%
  • Payout Ratio < 60
  • Sales 5 Year Avg > 3%
  • Price / Sales < 2
  • Margin of Safety > 1

Implement This Strategy Guide

Looking for value stocks in addition to stocks paying dividends is a great strategy, and the cornerstone of Warren Buffett and Ben Graham’s investing strategy.  While you may buy stock in a company for the dividends, if the stock price is likely to go down within your holding period the dividends might not offset the loss, so looking for value stocks that pay a dividend. It’s like buying extra insurance and avoiding unnecessary risks.

In this strategy, you want to look for dividend-paying companies that are inexpensive by traditional measures such as low price to earnings, price to sales and price to book. These companies should still be growing sales and earnings.

If you select Stock Rover as your screener you will have access to an exclusive set of criteria based on the Warren Buffett value investing principles of Fair Value/Intrinsic Value and Margin of Safety.

So let’s take a look at the results of this screen.

Screener Results – Carnival (Ticker: CUK)

Here we take a look at the second-highest dividend yield in the stock screen results.

Value Stock Plus High Dividend Yield
Value Stock Plus High Dividend Yield – Courtesy of Stock Rover
Stock Rover's Excellent Insight Panel
Stock Rover’s Excellent Insight Panel, Ratings For Value, Growth & Sentiment

From the initial view (above) I can see that despite a terrible year for the stock price, earnings have continued to grow.

The dividend yield is 5.1% which is healthy.  It has a 45% payout ratio which is reasonable.

It also has a nice looking margin of safety of 47%.  So at this price of $39 per share, there is very little risk in the deal.

If you think this is a good stock you should drill into the financials.  On the right, you can see the Stock Rover Ratings for Carnival.

Value Score – 83. The Stock Rover value score looks at EV / EBITDA, P/E, EPS Predictability, Price / Tangible Book, and Price / Sales. The Price / Tangible Book and Price / Sales values are compared within a sector whereas the other metrics are compared across all stocks with adequate data. The best companies score a 100 and the worst score a 0.

Growth Score – 90. The Stock Rover growth score looks at the 5 year history and also the forward estimates for EBITDA, Sales, and EPS growth to rank the best companies across all stocks with adequate data. The best companies score a 100 and the worst score a 0.

Quality Score – 91%. The Stock Rover quality score compares profitability and balance sheet metrics to find high-quality companies. Our computation includes ROIC, Net Margin, Gross Margin, Interest Coverage, and Debt / Equity ratio values. The best companies score a 100 and the worst score a 0.

So, this stock is looking like something I might invest in.

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We have various practical investing guides that can really help you:

5. Select Your Investments & Purchase Stock

Commissions Free Stock Trading with Firstrade

Now you have narrowed down the stocks that you want to buy so that you can build your portfolio.

Remember, Warren always says:

 

The best time to sell is never

Although not a strict rule, it pertains more to the fact that you need to buy and hold for the long-term.  If you have done your job well, you will not need to sell for the foreseeable future.

If you do not already have a broker to enable the purchase of shares, I would recommend the Firstrade the major broker with $0 commissions and the winner of our Top 10 Stock Brokers Comparison.

6. Understand ESG Performance & Returns

ESG Portfolio Performance

Interestingly, investing in companies doing the right thing ethically is not bad for your investing returns. In the chart above you can see that the portfolio return for the Top 20 ESG Companies for the previous 2 years was 40%, compared to a return for the NASDAQ 100 of 36.9% and only 28.5% for the S&P500.

ESG Portfolio Performance Over 2 & 5 Years

ESG Investment2 Year Performance5 Year Performance
Stock Rover Top 20 ESG Stocks+40%+113%
S&P500 Index+28.5%+77.3%
NASDAQ 100 Index+36.9%+108%

 

5 Year ESG Portfolio Performance

In fact, if we take a look even further back we can see that the 5-year return for this Stock Rover ESG portfolio was 113%, compared to 108% for the NASDAQ 100 and 77.3% for the S&P500.

ESG Portfolio Performance 5 Years
ESG Portfolio Performance 5 Years

Interestingly, some of the best companies in America are pushing hard to improve their ESG profile, so it is not surprising that the ESG portfolio performs well.  What is surprising is that ESG companies can outperform the market.

Top ESG Companies to Invest In

We can classify a wide variety of stocks as ESG companies. The ESG companies list includes many of the world’s popular stocks.  I would like to thank the team over at our Partner Stock Rover doing the research and building a Top 20 ESG Portfolio right into Stock Rover.

1. Alphabet (NASDAQ: GOOG)

 Yahoo! Finance gives the owner of Google a medium ESG risk score of 30. Alphabet receives a low environmental risk score of 0.9 and a high controversy level of four.

Alphabet is controversial because of charges of offensive material, political propaganda, and censorship on YouTube and Google. Alphabet (NASDAQ: GOOGL) often faces charges of monopoly because of Google’s dominance in search and online advertising.

Alphabet’s commitment to environmental sustainability is high. Alphabet plans to grow its green energy portfolio by 40% to generate 1.6 gigawatts (1.6 billion watts) of clean electricity, The Guardian reports.

Alphabet is investing in sustainable solar energy and wind projects in the United States, Europe, and Chile. The company will use sustainable energy to power its data centers.

2. Procter & Gamble (NYSE: PG)

The soap-making giant receives a 25 ESG risk score from Yahoo!! Finance.

P&G receives a high environmental risk score of 8.4 and a high social risk score of 8.6. Yahoo! Finance gives Procter & Gamble a significant controversy level of three.

Procter & Gamble management is trying to correct these deficiencies with a set of sustainability goals they call Ambition 2030. Procter & Gamble is trying to encourage responsible consumerism through powerful brands such as Tide and Ariel.

An example of P&G’s responsible consumerism is the use of laundry detergent and dishwasher pods. The belief is consumers use less soap with a pod.

P&G faces controversy because people have swallowed its laundry pods and died. News reports indicate thrill-seeking teenagers, toddlers, and people with dementia sometimes swallow poisonous pods. Organizations such as Consumer Reports believe P&G could make pods safer.

3. Johnson & Johnson (NYSE: JNJ)

Yahoo! Finance gives Johnson & Johnson a severe controversy level of five and a high ESG risk score of 36. J&J has a high-risk score because of charges it sold baby powder containing asbestos.

The asbestos is gone but Johnson & Johnson faces lawsuits over asbestos in baby powder. A New York state jury ordered Johnson & Johnson to pay $300 million to a woman named Donna Olson, Asbestos.com reports. Olson claims asbestos in Johnson & Johnson’s baby powder caused her cancer.

4. MasterCard (NYSE: MA)

The credit and debit card giant received a low environmental risk score of 0.1 from Yahoo! Finance. That gives MasterCard a low ESG risk score of 20.

MasterCard has a high controversy score because of the nature of its products. Many people view interest-charging instruments such as credit cards as dangerous and immoral. Many Muslims view charging interest as a sin.

ESG investors will appreciate MasterCard because of its low environmental risks score. Some values investors: including Muslims, will reject MasterCard because it makes money from interest.

5. BlackRock Inc. (NYSE: BLK)

The asset-management giant receives a moderate ESG risk score of 23 from Yahoo! Finance. Positive ESG factors at BlackRock include a low environmental risk score of 2.6 and a moderate controversy level of two.

BlackRock faces controversy because it invests in companies with low ESG scores. BlackRock owns stocks in oil companies and defense contractors, for instance.

BlackRock promotes ESG investing because several of its iShares exchange-traded funds (ETFs) use ESG principles to pick stocks. Those ETFs include iShares MSCI KLD 400 Social ETF (DSI), and the iShares ESG MSCI USA Leaders ETF (SUSL).

6. Ecolab Inc. (NYSE: ECL)

The chemical, sanitation, and pest-control company Ecolab receive a high environmental risk score of 14.1 because it uses pesticides. That gives Ecolab a high ESG Risk score of 32.

On the positive side, Ecolab receives a moderate controversy level of two because of a moderate governance risk score of 7.5. Ecolab is a well-run company with a lousy ESG score because of the nature of its business.

7. Visa (NYSE: V)

The payments giant has a low environmental risk score of 0.1 but a high social risk score of 11.2. Sustainalytics Inc. estimates Visa a low ESG risk score of 19.

Visa has a significant controversy level of three because of the nature of its business. Visa encourages consumerism and debt by issuing high-interest credit cards. Visa receives a moderate governance risk score of 7.9.

8. Apple (NASDAQ: AAPL)

Apple receives a high social risk score of 13 because of concerns about its supply chain. Many people consider the manufacture of Apple products by low-wage labor in China, in particular.

Sustainalytics, Inc. gives Apple a medium ESG Risk score of 24 because of a low environmental risk score of 0.6. Other complaints about Apple include charges of encouraging consumerism and bad habits. Some people believe Apple devices make people anti-social, cause mental illness, and discourage exercise.

 9. Vertex Pharmaceuticals (NASDAQ: VRTX)

Biotechnology firm Vertex Pharmaceuticals received a high social risk score of 18.1 from Sustainalytics, Inc. The social risk score is high because Vertex’s products are risky and expensive.

Vertex receives a low environmental risk score of 0.2 because its business has a small environmental footprint. Vertex receives a moderate controversy score because of the low environmental score.

10. Gilead Sciences (NASDAQ: GLD)

 The maker of antiviral drugs receives a perfect environmental risk score of 0.0 from Sustainalytics, Inc. Gilead Sciences receives a perfect score because its government generates no pollution.

Overall Gilead receives a medium ESG score of 22 because it receives a high social risk score of 14.3. Gilead takes high risks because it creates and tests drugs for deadly viruses such as AIDS. Gilead’s business is socially responsible because it tries to treat destructive diseases such as AIS.

11. NVIDIA (NASDAQ: NVDA)

 The chipmaker receives a low ESG risk score of 1.3 because of a low social risk score of 4.5.

NVIDIA receives a low social risk score because the social impact of its products is low. NVIDIA does not employ large numbers of low wage workers to make its products. That gives NVIDIA a lower controversy level of two.

NVIDIA’s social risks could increase in the future because it is heavily involved in artificial intelligence (AI) research and development. Some critics believe AI will destroy many jobs by operating next-generation robots and digital platforms. Others fear the military use of AI-controlled weapons.

Thus, NVIDA’s ESG risk score could increase in the future.

12. Intel Corporation (NASDAQ: INTC)

Intel receives a moderate environmental risk score of 4.9 because of the impact of its chip-manufacturing. Intel receives a moderate social risk score of 5.2 for unclear reasons.

The higher environmental and social risk scores give Intel a higher controversy level than NVIDIA. Sustainalytics, Inc. gave NVIDIA a lower controversy level of two because of Intel’s limited environmental risk.

13. Microsoft Corporation (NASDAQ: MSFT)

 Microsoft receives a low total ESG risk score of 15 because of a low environmental risk score of 0.4. Sustainalytics, Inc. gives Microsoft a lower governance score of 5.2.

Microsoft; however, receives a significant controversy level of three because of its history. Microsoft; historically has faced charges of monopoly and antitrust law violations.

In recent years, Microsoft has faced complaints about the security and safety of its software. Many Microsoft applications are vulnerable to the WannaCry cyberweapon, for example. That gives Microsoft a social risk score of 9.7.

14. Berkshire Hathaway (NYSE: BRK.B)

 Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) receives a high ESG risk score of 46 because of the nature of its business.

Berkshire Hathaway has a high social risk of 51.1 because it owns a candy maker (See’s) and a company that distributes snack foods and cigarette McLane. Berkshire has a high environmental risk score of 42.5 because it owns pipelines, coal-burning power plants, and stock in oil companies.

Sustainalytics Inc. gives Berkshire Hathaway a governance risk score of 43.8. Berkshire receives a high risk-score of 43.8 because of Warren Buffett’s famous hands-off decentralized management style.

Berkshire Hathaway shows that companies with high ESG risk scores can make a lot of money. Thus, buying stocks with high ESG risks could be a good investing strategy. Buffett makes lots of money by taking many ESG risks.

Summary & Further Reading

I hope this practical guide has helped you to kick start your ethical investing journey, for further reading on ESG & Ethical Investing here are some additional guides.

Stock Rover Review: Best Stock Screener-Value Investing 2020

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