In a world facing huge challenges both in politics, corruption and the looming environmental disaster, ESG investing is a way to simplify the investing process for ethical investors.
What is ESG Investing?
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.
ESG Investing Definition & Principles
| Environment | Social | Governance |
| Air Quality | Labor Policy | Executive Pay |
| Green Energy | Community Impact | Ethical Practices |
| Waste Mgt | Equal Employment | Transparency |
| Hazardous Materials | Equal Opportunity | Accounting & Taxes |
An ESG investor could refuse to invest in oil companies, or only invest in oil companies that admit Global Warming is real, for instance. Another ESG strategy is to refuse to invest in companies that engage in unethical or questionable practices.
An ESG investor could refuse to invest in companies that bribe officials or do business in undemocratic countries. Other ESG investors, could refuse to invest in companies that discriminate against gays or promote abortion.
ESG Investing is an attempt to make your investments reflect your values. A Christian ESG investor could refuse to invest in retailers that stay open on Sundays. A gay ESG investor could refuse to invest in companies that reject same-sex marriage.
Simplifying Responsible Investing with ESG
The ESG acronym is an effort to simplify responsible investing.
E is for Environmental, S is for Social, and G is for Governance. An ESG company tries to protect the environment, implement socially responsible policies, and practices ethical and transparent corporate governance.
An ESG company could have an independent board of directors and pay its employees higher wages than the industry norm. Plus, an ESG company will have no history of ethical lapses or complaints.
Many ESG investors believe corporate governance needs to limit executives’ power. An example of such governance is separating the roles of CEO and Chairman. Another is having an independent board of directors that can hold the CEO accountable for abuses or mismanagement.
ESG Investing Principles
Most ESG investors believe companies need to follow a set of principles. The commonly accepted ESG Investing Principles include:
Environmental ESG Principles
Concern for the environment and our planet’s future are core ESG principles. An ESG company’s management will consider themselves stewards of the Earth.
Some attributes of a true ESG company’s environmental commitment include:
A Commitment to Air Quality
Elon Musk’s Tesla Motors (NASDAQ: TSLA) is an ESG company because it manufactures electric vehicles, for example. Electric vehicles provide transportation without polluting the air.
ESG investors, need to be careful with automakers because electric vehicles shift pollution around. Most electric vehicles run on electricity from the grid. Fossil-fuel burning power plants generate most of the electricity from today’s power grids.
Musk is trying to correct that by building battery storage and solar panels. Mass adoption of those technologies could be years away, however.
Many Musk critics will contend hybrid vehicles, such as the Toyota (NYSE: TM) Prius, do more to fight air pollution than Tesla products. The belief is the Prius uses less fossil fuels and produces smaller amounts of air pollution than the power plants that provide Tesla’s electricity.
Green Energy
The term Green Energy usually describes alternative power sources to fossil fuels. Those alternatives can include wind, solar, hydro, and nuclear power.
Under these criteria, Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B) is a green energy investment. Berkshire Hathaway Energy invested $6.5 billion in solar projects through year-end 2018. Two of those projects are the largest solar energy projects in the United States.
Another obvious green energy company is Tesla Motors (NASDAQ: TSLA) which manufactures electric vehicles. Besides vehicles, Tesla Energy manufactures backup batteries for home and utility use, solar panels, and solar roofs. Elon Musk’s goal at Tesla Energy is an electric grid that is 100% solar powered.
The old-line industrial company General Electric (NYSE: GE) manufactures turbines and other wind energy devices. GE’s products include wind turbine blades, offshore wind turbines, and onshore wind turbines.
Wind turbines generate enough electricity to power Scotland, The Independent claims. Scotland’s example proves wind turbines are a viable power source.
Many companies are involved in green energy. The best way to find green energy companies is to poke around at company websites.
Waste Management
In ESG, waste management means a company responsibly disposes of its waste materials.
Responsible disposal means recycling instead of throwing items in the landfill. A responsible company will also dispose of hazardous or toxic waste in a safe manner.
A company that ships old electronics or chemicals overseas for disposal is not engaging in responsible waste management. Thus, in ESG waste management the devil is in the details.
Many companies that claim to engage in responsible waste management do not. Other waste management efforts are window dressing. A company that makes its packaging from recyclable materials but fails to provide recycling facilities is not an ESG investment.
Hazardous Materials in Products
Many companies have hazardous materials in their products.
Johnson & Johnson (NYSE: JNJ); which is often called an ESG investment, made baby powder that contained asbestos, for example. Such hazardous materials can be expensive for companies. Johnson & Johnson recalled 33,000 bottles of baby powder that contained asbestos, CNBC claims.
Having hazardous materials in your products is not a responsible or ethical business practice. Any company that manufactures plastics, chemicals, or fuel could have hazardous materials in their products.
ESG investors need to be aware of hazardous materials because they can be in any product. Johnson & Johnson demonstrated ESG attributes by confirming its baby powder no longer contains asbestos.
Social ESG Principles
Labor & Employee Relations
Treating employees well is both socially responsible and good governance.
The ESG belief in labor and employee relations is that well-treated employees will be more productive. A related theory is that companies with happy employees will make more money.
Well-treated employees are less prone to strike or quit. Most people believe happy employees are more productive and loyal to the company.
The most popular means of treating employees well is to pay them more. Examples of that ESG move include Amazon’s (NASDAQ: AMZN) plan to pay all its employees $15 an hour or more, and Bank of America’s (NYSE: BAC) plans for a $20 an hour minimum wage.
Some profitable companies with high stock prices have reputations for treating employees well. A classic example of such a company is Warren Buffett favorite Costco Wholesale (NASDAQ: COST). Costco offers higher wages than the industry norm (starting at $15 an hour.)
McDonald’s is one of many American companies that pay employees’ college tuition. The strategy behind McDonald’s scholarships is to develop loyalty to the company. Another hope is to attract more responsible and higher quality employees.
The scholarships are popular in the United States where the government refuses to pay most students’ college tuition.
Community Impact and Responsible Corporate Citizenship
A key tenet of ESG is that companies need to be responsible citizens and make a positive impact in their communities.
Examples of community impact include companies that make large donations to charity or support law enforcement, schools, or the military. Many companies make a point of advertising their philanthropy.
Brewers such as MillerCoors (NYSE: TAP) often donate canned or bottled water to disaster victims, for instance. Walmart (NYSE: WMT) makes extensive donations to community organizations, national charities, and cultural groups. Plus, the grocer Kroger (NYSE: KR) donates large amounts of food and other items to food banks to sustain the poor.
Other examples of community impact include respecting community members and their values. Such efforts include reaching out to minority communities and direct aid to community memberships such as scholarships.
Socially responsible companies obey and respect the decisions of people in communities. An ESG company could refuse to build a store in a community where residents do not want it.
Equal Employment and Opportunity
Not engaging in discrimination is a basic tenet of ESG investing. Companies that offer equal opportunities regardless of race, sex, religion, and sexual orientation are responsible.
The obvious example of equal employment is the number of women, people of color, and minorities working at a company. Another sign of equal opportunity is a lack of discrimination lawsuits. An example of equal opportunity is McDonald’s (NYSE: MCD) efforts to make franchise opportunities available to minorities.
Many American companies encourage diversity by offering college scholarships to people of color. McDonald’s is one of many American companies that offer scholarships to minority employees.
Having a strong diversity policy will not guarantee social responsibility. A socially responsible company enforces and practices its diversity policy.
Governance in ESG
Ethical and responsible corporate governance is one of the foundations of ESG Investing.
Ethical Business Practices
ESG investors try to encourage responsible corporate governance by only investing in corporations they consider ethical. These investors look for ethical business practices.
Most ESG investors believe they can encourage responsible corporate behavior by refusing to invest in unethical companies. Many ESG investors refuse to invest in tobacco companies or weapons manufacturers, for instance.
Some “Ethical Business Practices” are easily understood. Refusing to engage in bribery or break the law, for instance.
Investors disagree over what constitutes ethical practices. Many people consider defense contractors unethical because they manufacture weapons. Other investors view a refusal to manufacture weapons and munitions needed for national defense as unethical.
Others will try to expand the definition of Ethical Practices for political and philosophical purposes. Many Muslims view charging interest as an unethical business practice, for instance, which could make all banks unethical in their eyes.
A simple definition of an unethical business practice is any corporate activity you consider wrong. Thus, ESG investors never invest in companies they view as unethical.
An easy way to detect unethical behavior is to examine a company’s marketing and advertising. Making false, exaggerated, or unsubstantiated claims about a company’s products and services is unethical behavior.
Many investors will not hold stock in any company that makes dubious claims. Other people will view some kinds of marketing, such as television advertisements for drugs, as unethical.
ESG investors view all aspects of a company’s business including salaries, employee relations, manufacturing, environmental policies, rules, and political activity through an ethical lens.
Some ESG investors in the United States turned on Telsa Motors (NASDAQ:TSLA) when its CEO Elon Musk tried to develop a close relationship with President Donald J. Trump (R-Florida). The belief is that Trump is unethical and any support for him is wrong.
Ethical business practices are not simple or easy to define. Many investors avoid ethics because they are complex and hard to define.
Board & CEO Structure
Many ESG Investors view a corporation’s board of directors as one of its most important features.
The theory is that a strong board of directors can hold the Chief Executive Officer (CEO) and other executives accountable for their behavior. The board can vote the CEO out at any time.
These investors look for companies with independent boards of directors. One sign of an independent board is a board that appoints its members. The idea is to prevent a CEO from packing the board with supporters who will rubber his or her policies.
Another feature ESG investors seek is a company with several strong and independent executives. Independent Chief Financial Officers (CFOs), Counsels, and Chief Technology Officers for instance. The idea is those individuals could serve as a check on a corrupt or incompetent CEO.
Executive Pay
Executive pay and other compensation are a huge issue in the United States because of growing income inequality. The complaint is that incomes for average people fall as executive compensation increases.
Many people view the high salaries and large stock options some executives receive as unethical. These people refuse to invest in companies that pay what they see as outrageous executive salaries.
Avoiding companies with high CEO pay could be a good investment practice. Investopedia estimates total shareholder return for the US company with the 200 highest-paid CEOs fell by 5% in 2018.
You can identify companies with high executive pay by examining Equilar’s list of the highest paid US CEOs. However, many ethical investors consider Equilar’s highest-paid US CEO; Elon Musk of Tesla Motors (NASDAQ: TSLA), a hero because of his commitments to electric vehicles and solar energy.
Transparency
Many investment strategies rely on high levels of corporate transparency and ethical accounting practices.
Transparency means that a company reveals as much information to investors as possible. At a transparent company, financial reports will reveal losses, problems, and setbacks in addition to corporate achievements.
Management will reveal problems to the public, investors, and the press as soon as they occur. Executives will not try to hide or cover up any problems or troubles.
A transparent company will post all its sales, financial, expenses, and other data online for investors to read. Executives will speak to the press and divulge everything in the earnings call.
Transparency is vital because you cannot tell how much money a company makes without it. The assumption of corporate transparency is the basis of some investing systems.
Value investors base their decisions about financial data such as cash flow, income, revenue, and gross profit that show how much money a corporation makes. If the financial data is inaccurate the investors cannot make informed decisions about the company.
Growth investors base decisions on sales figures, information about new products, patents, marketing, and other details of a company’s operations. If that data is inaccurate growth investors could think a company is growing faster than it is or not growing at all.
Accounting Practices and Taxes
The corporate scandals of the early 21st Century made investors aware of the importance of ethical accounting practices.
Many people invested in Enron because they thought it was making money, for example. Enron hid its losses with a variety of shady accounting practices. The Enron scandal led the United States Congress to mandate certain practices through the Sarbanes-Oxley Act.
Determining whether a company’s accounting practices are ethical and effective can be tough, however there are a few signs of ethical accounting practices investors can look for.
The location of the company’s legal headquarters can indicate questionable accounting. Companies based in countries with strong corporate regulations such as the United States, Germany, or the United Kingdom, could have better accounting practices.
Standard ethical accounting practices include the revelation of all losses and major transactions in the financial report, revelation of off-balance transactions, revelation of tax liabilities, the retention of an independent auditor, usually an accounting firm, and disclosure of any potential conflicts of interest. Another standard ethical accounting practice is for the CEO to sign the company’s tax return.
A good rule of thumb is that an ethical company will reveal everything in its quarterly or yearly financial reports. If any information is missing, there is something wrong.
Taxes are a more complex issue because people disagree over the proper levels of corporate taxation. Currently, many people believe corporate taxes in the United States and some other countries are too low.
Some people also view the popular practice of domiciling companies in countries with lower tax rates as unethical. Thus, a corporation’s tax structure is part of many ESG analyses.
Types of ESG Investing
There are many kinds of ESG Investing out there. Investing strategies vary widely because different investors have different philosophies.
Some of the most popular ESG Investment Strategies and Philosophies include:
Social Investing
Social investors consider the social impact of a company’s practices on the wider society.
Social investors look at how a company treats its employees and customers. Left-wing social investors could refuse to invest in non-union companies, companies that engage in union-busting, or companies that pay low wages.
Some social investors look at other factors such as executive compensation. They could refuse to own stock in companies that pay huge salaries to executives.
Other social investors will refuse to invest in companies that manufacture or market alcohol, tobacco, candy, weapons, pornography, and other harmful products. Some social investors will go farther and refuse to invest in entertainment or video game companies that produce violent content.
Additional social investing factors include racial discrimination, equality, and a company’s political involvement. Many social investors will refuse to invest in companies that donate money to candidates whose policies they oppose.
Values Investing
Values investors base their decisions upon their values. A Christian values investor could refuse to invest in companies that promote gay rights or abortion, for example.
A gay values investor, however, will refuse to donate in companies that do not offer benefits to same-sex partners. A Moslem values investor could refuse to in banks that charge interest.
An animal rights values investor could refuse to invest in a company that sells meat. Yet an animal rights values investor could invest in Beyond Meat (NASDAQ: BYND) which manufactures vegan meat alternatives.
The difference between social investors and values investors is that values investors look at the underlying values. Social investors, however, examine the social impact of a company’s products or strategies.
Sustainable and Responsible Investing
Sustainable and Responsible Investors (SRI) consider the environmental impact of a company’s actions.
An SRI investor could refuse to invest in a company that burns fossil fuel, for instance. Thus, you can consider Tesla Motors (NASDAQ: TSLA) an SRI stock.
Some SRI investors will reject Tesla because it makes batteries from lithium, which must be mined, however. Lithium miners pollute the environment and burn fossil fuels in mining machines.
Many SRI investors evaluate all products for sustainability. Others will try to avoid products that could encourage war or what they see as imperialism.
Impact Investing
Impact investors examine the long-term consequences of a company’s policies rather than its goals or policies.
An impact investor will ask how much pollution a company generates. The impact investor could reject Beyond Meat (NASDAQ: BYND) because it makes burgers from soybeans. Farmers use diesel-burning machines to grow and harvest soybeans, which harms the environment.
An impact investor could ignore complaints about the violent content in Disney (NYSE: DIS) films and shows. The same impact investor; however, will reject Disney because of the low wages it pays at theme parks. An impact investor could also reject Disney because of the fuel its cruise ships burn.
Ethical Investing
All ESG investors claim to be Ethical Investors. Pure ethical investors base decisions only on ethics.
A pure ethical investor will not invest in a company that does anything he or she considers wrong. The difference between Ethical and Value Investors is that ethical investors focus on corporate behavior.
Ethical investors will refuse to invest in a company where an executive does anything they view as wrong. An ethical investor could refuse to buy stock in a company where an executive is accused of theft, fraud, or sexual harassment for example.
Ethical investors generally have rigid views of right and wrong. Value and impact investors, in contrast, are big picture thinkers who look at the philosophy and long-term impact of corporate actions.
Thus, ethical investors examine corporate behavior, while value investors look at a company’s policies.
Triple Bottom Line Investing 3BL
Triple Bottom Line Investing or Integrating Bottom Line Investing, or 3BL, is a strategy that evaluates investments with three principles or pillars.
The Three Pillars are People, Planet, and Profit. Triple Bottom Line Investors look to see how a company treats people, what it does for the planet, and the money it makes.
Triple Bottom Line Investing is an effort to combine, values, social, ethical and sustainable investing. Investors make decisions based on what they consider important.
Blended Value Investing
Blended value investing is an attempt to combine values investing and value investing.
A blended value investor will look for companies with classic value attributes that promote his or her values. A blended value investor will look for cash-rich companies that refuse to burn fossil fuels, for example.
Social Enterprise Investing
Social Enterprise Investors believe corporate decisions can change society.
A Social Enterprise Investor will look for companies he thinks will change society, the world, or the industry for the better. A Social Enterprise Investor who supports gay rights could refuse to buy stock in a company that refuses to back same-sex marriage.
A Social Enterprise Investor will buy Tesla Motors (NASDAQ: TSLA) to promote electric cars or Beyond Meat to promote meat alternatives. Social enterprise investors value a company’s social impact over its moneymaking capabilities.
Negative & Exclusionary Screening
Negative or exclusionary screening is a strategy that screens out investments that violate ESG principles.
An environmentalist could screen out investments in oil companies and companies that burn coal with exclusionary screening. A Christian could screen out retailers that remain open on Sunday.
ESG investors use negative and exclusionary screening to eliminate investments that violate their principles from their portfolios. All ESG investors are exclusionary investors but some people think negative screening only applies to sustainable investments.
ESG Investing Trends
The amount of money in ESG investments is hard to determine. Forbes contributor Georg Kell estimates the largest ESG initiative contained $70 trillion in assets in 2018.
The largest ESG effort is the United Nations-sponsored Principles for Responsible Investment (PRI). Kell estimates that PRI had over 1,600 members in 2018. Kell, however, estimates that ESG funds managed $20 trillion in assets in 2018.
The Global Sustainable Investment Alliance (GSIA) estimates that there $30 trillion in sustainable investments in 2018, Greenbiz reports. In Europe, the GSIA estimates sustainable investments were worth $14.1 trillion.
Sustainable investing is growing fast, the GSIA claims. Sustainable assets under management in the United States grew from $8.7 trillion in 2016 to $12 trillion in 2018. The GSIA estimates that $19.8 trillion was invested through the largest sustainable investing strategy in 2018.
Leaders in ESG include the PRI and former United Nations Secretary-General Kofi Anan. Anan organized one of the first ESG efforts in 2004.
Another leader is fund manager Jed Emerson, the inventor of Blended Value investing. Emerson wrote one of the first books on impact investing in 2012 with Antony Bugg-Levine. Emerson has written seven books on Social Entrepreneurship and Impact Investing.
The latest trend in ESG is risk assessment. Companies such as Sustainalytics, Inc are creating ESG risk assessment tools. Sustainalytics, Inc measures a company’s ESG risk, environmental risk, social risk, governance risk, and significant controversy level.
There are online resources that can tell you a company’s ESG Risk. Yahoo!! Finance uses Sustainalytics, Inc. Tools to measure a company’s ESG risks, for example.
You can learn a stock’s ESG risk, by typing the company name or a ticker symbol and the acronym ESG into a search engine. The search engine will direct you to websites that measure companies’ ESG risk.
- Related Article: How to Build Your Own ESG Investment Portfolio
Top ESG Companies to Invest in
We can classify a wide variety of stocks as ESG companies. The ESG list includes many of the world’s popular stocks.
Some of the most interesting ESG companies in today’s market include:
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.
Top 10 ESG Investing Funds
1. Vanguard FTSE Social Index Fund Admiral (VFTAX)
The American mutual fund giant Vanguard has offered its FTSE Social Index Fund since 2000. That makes the VFTAX one of the pioneers in social investing.
Vanguard bases the VFTAX on Britain’s Financial Times Stock Exchange 100 Index (FTSE). The VTAX contains low and mid-capitalization stocks they screen for human rights, environmental, and social ESG concerns. Vanguard plans to revise the FTSE Social Index Fund to match up to date human rights concerns in March 2020.
The Vanguard FTSE Index Fund Admiral requires a minimum investment of $3,000. There was a low expense ratio of 0.14% in December 2019.
2. iShares ESG MSCI USA Leaders ETF (SUSL)
The iShares ESG MSCI USA Leaders ETF (exchange-traded fund), or SUSL, tracks the investment results of an index of large and mid-cap American companies.
The companies in the SUSL index have high environmental, social, and governance (ESG) ratings. iShares; a subsidiary of the American asset-management giant BlackRock (NYSE: BLK), evaluates the ESG MSCI USA shares for ESG criteria.
Stocks held by the iShares ESG MSCI USA Leaders ETF, include such market leaders as Alphabet, Microsoft, Johnson & Johnson, Visa, the Walt Disney Company (NYSE: DIS) and Procter & Gamble.
The iShares ESG MSCI USA Leaders ETF offers a high margin of safety because it invests in lucrative; and well-established American brands, such as Disney, Intel, and the Home Depot (NYSE: HD).
3. Pax Ellevate Global Women’s Leadership Fund (PXWIX)
Pax World Funds allows woke people to “invest like a feminist.” Pax World bases its funds on the premise “that research shows companies perform better with more women in leadership roles.”
They base the Pax Ellevate Global Women’s Leadership Fund on the Impax Women’s Leadership Index. The Impax Leadership is an index of companies with the best for appointing women to leadership roles.
The Pax Ellevate Global Women Fund invests in companies that promote female leaders and work for gender equality. The Pax Ellevate Fund is fossil-fuel free and meets other ESG standards.
The Pax Ellevate Fund allocates 59.2% of its funds to US socks, 31.1% of its money to non-U.S. stocks, and 9.8% of its assets to exchange-traded funds (ETFs). They allocate around 62.5% of Pax Global Leadership’s funds to North American markets.
4. Fidelity U.S. Sustainability Index Fund (FITLX)
The FITLX from American mutual funds giant Fidelity invests 80% of its funds in mid to large-capitalization U.S. companies with high ESG ratings.
Major holdings in the Fidelity U.S. Sustainability Index Fund include Microsoft, Alphabet, Johnson & Johnson, Visa, Procter & Gamble, MasterCard, Disney, Intel, and Verizon Communications (NYSE: VZ). The big advantage of the FITLX is that there is no minimum investment amount.
5. iShares ESG MSCI USA ETF
The iShares ESG MSCI USA ETF tracks an index of American companies that meet certain ESG characteristics. iShares, a subsidiary of BlackRock seeks to get a similar risk and return to iShare’s MSCI UA Index while promoting sustainability.
The iShares ESG MSCI USA ETF uses a variety of complex criteria to pick stocks. Those criteria include ESG quality, ESG coverage, the MSCI ESG Rating, the MSCI ESG Quality Score, and the MSCI Weighted Average Carbon Intensity.
BlackRock charges a 0.15% fee for participating in the iShares ESG MSCI USA ET.
6. Xtrackers MSCI USA ESG Leaders Equity ETF (USSG)
The Xtrackers MSCI USA ESG Leaders is an exchange-fund (ETF) based on an index of large cap U.S. stocks. Xtrackers picks stocks with high ESG ratings for the MSCI USA ESG Leaders.
Stocks on the MSCI USA Leaders index could include Microsoft, Alphabet, Johnson & Johnson, Visa, MasterCard, Intel, Visa, The Walt Disney Company, and Verizon. The MSCI USA ESG Leaders Equity ETF is one of many ETFs and Mutual Funds from DWS Group.
7. SPDR S&P 500 Fossil Fuel Reserves Free ETF (SP5F3UP)
They base this exchange-traded fund on an index of S&P (Standard & Poor’s) 500 companies that do not own fossil-fuel reserves.
The companies in the SPDR S&P 500 Fossil Fuel Reserves Free ETF do not own any oilfields, coal mines, or natural gas wells. Stocks in the SP5F3UP include Berkshire Hathaway (NYSE: BRK.B), Alphabet, Apple (NASDAQ: AAPL), JP Morgan Chase & Company (NYSE: JPM), and Facebook Inc. (NASDAQ: FB).
The ESG potential of the SPDR S&P 500 Fossil Fuel Reserves Free ETF is questionable. One company it owns Berkshire Hathaway owns pipelines that move oil. Sustainalytics Inc. gave Berkshire Hathaway a high ESG risk score of 46 on January 1, 2020.
Many people will not consider the SPDR S&P 500 Fossil Fuel Reserves Free ETF an ESG investment because it owns Berkshire Hathaway.
8. Parnassus Endeavor Investor Shares (PARWX)
The team behind the Parnassus Endeavor Fund Investor fund uses ESG criteria as one factor in its stock-picking process. The other criteria the Parnassus portfolio managers use include low share prices, quality management teams, and long-term competitive advantages.
Parnassus’s managers consider outstanding workplaces and refusal to invest in fossil fuels as ESG criteria. The advantage to Parnassus is that it holds stocks other ESG funds do not.
Parnassus’s 2020 holdings include The Gap (NYSE: GPS), FedEx Corp (NYSE: FDX), and Cisco Systems Inc. (NASDAQ: CSCO). The ESG criteria of some of Parnassus’s holdings are questionable.
FedEx uses hundreds of airliners and thousands of trucks that burn fossil fuels, for instance. The Gap sells clothing that overseas sweatshops could manufacture.
The PARWX has a minimum initial investment of $2,000, so it is very expensive.
9. Vanguard ESG U.S. Stock ETF (ESGV)
The Vanguard ESG excludes some stocks of companies that do not meet the standards of the UN global compact. Vanguard ESG also excludes some stocks in companies that do not meet diversity criteria.
The Vanguard ESG tracks the performance of the FTSE US All Cap Choice Index. Vanguard’s team evaluates stocks in that index for ESG criteria and picks shares for the ESG.
The Vanguard ESG’s major holdings include Apple, Microsoft, Alphabet, Amazon (NASDAQ: AMZN), Facebook, Visa, JPMorgan Chase & Co., Visa, Procter & Gamble, MasterCard, and Intel. The Vanguard ESG owns some companies with questionable ESG criteria.
Amazon relies on fossil-fuel burning trucks, airplanes, and vans to deliver its products, for example. Critics accuse Apple of manufacturing phones and other products in Chinese sweatshops.
10. iShares MSCI KLD 400 Social ETF (DSI)
The MSCI KLD 400 Social Index is one of the oldest Socially Responsible Investing (SRI) indexes formed in May 1990. The iShares MSCI KLD 400 Social ETF (DSI) is an exchange-traded fund based on the KLD 400 Index.
The goal of iShares MSCI KLD 400 Social ETF (DSI) is to give investors exposure to socially responsible US companies. The major iShares MSCI KLD 400 Social holdings include Microsoft, Facebook, Alphabet, Visa, MasterCard, Procter & Gamble, Intel, Home Depot, and the Walt Disney Co.
Many people will question the ESG criteria of the MSCI KLD 400 Social because of some of the companies it holds. The Home Depot is a big box store that sells lumber and chemicals, for instance. Critics accuse the Walt Disney Co of paying low wages at its theme parks and poor treatment of employees.
ESG Investing is Not Easy
ESG Investing is not as simple as many people believe. There are many “ESG investments” with dubious ESG criteria.
Many of the ESG funds own companies that use large amounts of fossil fuels for example. Critics accuse other companies’ portfolio managers describe as ESG investments of poor treatment of employees.
Some ESG funds own the Walt Disney Company. Union leaders and other critics accuse Disney of mistreating and underpaying theme park employees.
A more questionable ESG investment is Berkshire Hathaway which holds stock in soft drink maker Coca-Cola (NYSE: KO) . Berkshire Hathaway owns the Burlington Northern Railroad which transports coal and other fossil fuels. Berkshire subsidiary McLane markets sugary snacks and cigarettes and operates large numbers of fossil-fuel burning trucks.
Lawsuits accuse Johnson & Johnson, which some ESG funds own, of selling baby powder that contained asbestos. Those suits claim the asbestos in Johnson & Johnson’s baby powder caused cancer in its customers.
Another questionable ESG investment is Alphabet which owns the self-driving car company Waymo (the former Google Car). Critics claim self-driving vehicles could cause mass unemployment by destroying hundreds of thousands of jobs.
Skeptics accuse the supposed ESG investment Facebook of promoting racism and genocide. Some Facebook critics accuse Facebook of encouraging anti-Muslim violence in Myanmar (Burma) by allowing anti-Islamic propaganda to appear on Facebook pages. The critics claim the propaganda encouraged attacks on Myanmar’s Muslim minority.
Many people will not consider some of the companies held by many ESG funds, ESG investments because of their history. Investors need to realize that companies that meet ESG criteria could violate their values.
The listing of these companies as ESG investments shows investors need to research funds and companies themselves. Fund managers will try to pass any company that meets a few criteria as an ESG investment.
If you want to enforce ESG principles, you need to read the list of stocks an ESG fund owns and research those companies before buying the fund. Many ESG funds own controversial or questionable companies that meet a few ESG criteria.
Successful ESG Investing, like all investing, involves a lot of research. If you do not want to do the research, you need to avoid ESG Investing.
