ESG stocks have become some of the hottest sectors of the market. In 2020, millennial investors contributed $51.1 billion to sustainable funds in 2020. That was over 10 times the amount of money going to similar funds just five years prior to that.
Investing in ESG stocks allows investors to allocate their capital in a way that aligns with their personal values and beliefs. Companies have found that many investors require that a company have and post their ESG rating (also referred as "sustainability rating"). Not surprisingly, many corporations have created executive positions and entire departments that focus on a company’s ESG efforts.
Besides caring for the environment and society as a whole, you may want to put ESG stocks on your radar because there's compelling evidence that they deliver higher risk-adjusted returns over their non-ESG peers over the long run.
Looking for the top ESG stocks to invest in? We've assembled a list of the 11 best ESG stocks to buy now based on their fundamentals and social responsibility practices. Let's explore what defines an ESG stock and which companies are the best to buy right now.
What Are ESG Companies?
An ESG company is a business that incorporates environmental, social and governance (ESG) factors as part of its core strategy. There are three general principles that ESG companies follow. Each letter corresponds to a different value.
Take a look at ESG stock meaning:
- Environmental: The “E” in ESG stands for environmental. ESG companies are businesses that are environmentally sustainable and have a positive environmental impact. They often use renewable resources, have a low carbon footprint and are waste efficient.
- Social: The “S” in ESG stands for social. ESG companies are businesses that have a positive social impact. They often have programs that help their employees, customers and communities. They often incorporate a commitment to diversity, inclusion and social justice.
- Governance: The “G” in ESG stands for governance. ESG companies are businesses that have good governance practices, which means they are transparent and accountable. They often have a commitment to ethical business practices.
In short, ESG companies are businesses that are sustainable and have a positive impact on the environment, society and the economy. To uncover the meaning of more popular acronyms, take a look at our stock trading terms article.
According to the CFA Institute, a worldwide nonprofit organization, ESG pillars can include the following:
Air and water pollution
Data protection and privacy
Audit committee structure
Gender and diversity
Bribery and corruption
The Upright Project publishes a report with the net impact ratio using its proprietary net impact model.
ESG Company Examples
An example of a company that has an effective ESG policy is Unilever (NYSE: UL). Unilever’s sustainable living plan sets out the company’s ambition to double the size of its business while halving its environmental impact. The plan is relevant to Unilever’s core business activities, underpinned by strong governance arrangements, including regular reporting on progress against targets.
Other companies that have been recognized for their effective ESG policies include IKEA, which has a long-standing commitment to sustainability, and Alphabet (NASDAQ: GOOGL), which has a comprehensive set of policies covering a range of environmental and social issues.
What Are ESG Stocks?
ESG stocks are those that take into account environmental, social and governance factors when making investment decisions. This type of investing is often referred to as sustainable, responsible or impact investing. ESG stocks have become increasingly popular in recent years as more and more investors look to put their money into companies that make a positive impact on the world.
The International Monetary Fund (IMF) estimates that ESG stocks were issued $90 billion of debt last year, which is more than triple the previous amount the year prior. The IMF expects this trend to continue in the years to come.
While there are a number of different ways to measure a company’s ESG performance, there are a few key factors that are typically considered, such as emissions and pollution, employee treatment and customer privacy.
There are a number of different benefits associated with investing in ESG stocks. For one, it can help to create a more sustainable and just world. Additionally, ESG stocks tend to outperform their traditional counterparts over the long term. This is due to a number of factors, including the fact that ESG companies are typically better managed and have more engaged employees.
11 Best ESG Stocks Right Now
These 11 best ESG stocks were chosen due to their business fundamentals, results from last quarter, as well as their effectiveness in implementing their ESG policies.
Partially due to the rising importance of social responsibility factors, companies on this list are often some of the most active stocks by dollar volume.
What are the best ESG stocks with the best ESG stock price? Let's take a look.
1. Adobe Inc.
Adobe Inc. (NASDAQ: ADBE) specializes in digital media and creative software products. The company's products include Creative Cloud, Photoshop, Acrobat and Lightroom.
Adobe is committed to sustainability and has embedded this value into its code of business conduct and sustainability guiding principles. These principles include creating healthy and innovative work environments, reducing operational costs, increasing productivity and fostering a culture of involvement in sustainability.
2. Salesforce Inc.
Salesforce Inc. (NYSE: CRM) is a global cloud computing company that provides business software on a subscription basis. Salesforce offers a suite of enterprise software, including customer relationship management (CRM), enterprise resource planning (ERP) and marketing automation.
Salesforce is implementing ESG principles from a couple of decisive angles. The company has a goal of having 40% of its workforce be women or nonbinary individuals by 2026. The company also recently announced that it had achieved its goal of net-zero emissions across its full value chain.
3. Accenture PLC
Accenture (NYSE: ACN) is a global professional services firm that provides consulting, technology, and outsourcing services.
As a consulting company, one of Accenture's services is to help its clients become more inclusive and equitable, helping them deliver on their ESG policies. It also helps businesses reduce their carbon emissions and create sustainable value chains and management plans.
4. Best Buy Co. Inc.
Best Buy Co. Inc. (NYSE: BBY) is a multinational consumer electronics retailer headquartered in Richfield, Minnesota.
Best Buy is in the process of rolling out several ESG strategies. These include becoming carbon neutral by 2040 to help fight climate change. So far, the company claims to have reduced its emissions by 61% since 2009. Best Buy also claims to operate the United State's largest e-waste recycling program and intends to save its customers $5 billion in targeted energy savings by offering eco-friendly products.
5. Texas Instruments Inc.
Texas Instruments Inc. (NASDAQ: TXN) produces semiconductors and other electronic devices. Texas Instruments is one of the largest producers of chips in the world and supplies chips to a variety of industries, including automotive, industrial and consumer electronics.
Texas Instruments' ESG policies are centered around making its semiconductors affordable. These components have a wide range of benefits to the environment. Semiconductors make electric motors smarter and preserve natural resources by sensing water and gas leaks, among other uses.
6. Microsoft Co.
Microsoft Co. (NASDAQ: MSFT) is a global technology leader that develops, manufactures, licenses and supports a wide range of software products and services. The company's products include operating systems for personal computers, servers, mobile devices, productivity applications, business solutions and gaming and entertainment consoles.
Some ESG initiatives Microsoft has taken part in include giving $1.9 billion in donated or discounted products in 2020, progressively reducing its carbon footprint and providing connectivity to 15.1 million people who live in rural areas without internet access.
7. NVIDIA Corp.
NVIDIA Corp. (NASDAQ: NVDA) designs and manufactures graphics processing units (GPUs) for gaming and professional markets. Nvidia's main products include GeForce for gamers and the Quadro line for professionals.
NVIDIA is implementing ESG efforts through a number of avenues. First of all, the company was rated as the best company to work at in the United States by its employees. In the future, NVIDIA has plans for its operations to be powered solely by renewable energy. In addition to that, the company claims that its GPUs are 20 times more energy efficient for certain tasks than its competitors.
8. Oracle Corp.
Oracle Corp. (NYSE: ORCL) is a multinational computer technology corporation headquartered in Redwood Shores, California. The company specializes in developing and marketing database software and technology and enterprise software products, including its own brand of database management systems.
Two of Oracle's ESG initiatives are centered around reducing emissions and recycling used hardware. As for its specific goals, Oracle targets using 100% renewable energy by 2025 with a longer-term vision of reaching net zero emissions by 2050. Oracle claims to have reused and recycled 99.9% of its retired hardware in 2022.
9. Qualcomm Inc.
Qualcomm Inc. (NASDAQ: QCOM) is an American multinational semiconductor and telecommunications equipment company that designs and markets wireless telecommunications products and services.
Some of Qualcomm's ESG goals for 2025 include reducing greenhouse gas emissions by 30% compared to its 2014 baseline. Other efforts include increasing women's role in leadership by 15% and reducing its power consumption by 10% every year in its mobile platform products.
10. Hewlett-Packard Enterprise
Hewlett-Packard Enterprise (NYSE: HPE) is a multinational information technology company headquartered in Palo Alto, California.
HP is gradually reducing its carbon dioxide emissions, which are claimed to have shrunk by 3% from 2020. The company has also helped 349,000 essential workers through empowerment programs since 2015. HP has also benefitted 74 million people through its educational programs.
11. Nike Inc.
Nike Inc. (NYSE: NKE) is a multinational corporation that designs, develops, manufactures and markets and sells footwear, apparel, equipment, accessories and services.
Nike has a number of ESG initiatives designed to help protect the planet. It aims to reduce 500,00 tons of greenhouse gas emissions by using environmentally friendly materials. It plans to divert 100% of its waste from landfills into its extended supply chain. Nike also intends to restore 13 billion liters of water via its extended cotton supply chain.
Investors can invest in individual stocks or get the benefits of immediate diversification and invest in an exchange-traded fund (ETF) that focuses on ESG investing. Some of the more popular ETFs that focus on companies with a high ESG score include:
To identify the stocks that meet your specific criteria, MarketBeat has an ESG stock screener that is available to Premium members. This tool allows investors to sort through a list of the top 100 ESG stocks based on selectable criteria such as:
- Value set (the importance of different impact categories)
- Market cap
- Media sentiment
- Analyst consensus
What are the Benefits of ESG Ratings?
The principal benefit of investing in ESG stocks is the ability of investors to align their investments with their personal values, which allows investors to promote socially conscious businesses in the way they distribute their investment dollars. Having metrics such as a net impact ratio makes it easy for ESG investors to compare one stock to another.
What are the Risks of ESG Ratings?
One risk related to ESG ratings is a lack of clarity on ESG guidelines. Many companies, particularly fund companies, use proprietary formulas to create an ESG rating. However, the weighting that one company assigns to a particular aspect of ESG is likely to vary from company to company. This also means that investors must pay close attention to the method used in assigning an ESG rating. Some ratings may be more heavily weighted to one aspect over another.
Another risk is that while ESG stocks as a group may outperform other stocks, poor-performing stocks may have high ESG ratings. A good example of this includes clean energy stocks such as hydrogen stocks. The long-term outlook for these stocks may be promising, but as of 2022, the payoff remains years away. However, experts once said the same about solar stocks, but since the COVID-19 pandemic, solar stocks have been among the best performers.
Another potential risk of ESG ratings is that making a commitment to companies with a high ESG score may mean that investors exclude some of the top-performing stocks, which can affect their total return.
Do ESG Stocks Outperform the Market?
This is still a relatively young area of the stock market, but there is some evidence that ESG stocks do outperform the market. At least, they have the potential to do so. That’s because adhering to ESG principles can be financially material to a company’s bottom line. In fact, in many studies, companies that scored high on ESG issues tend to deliver higher profits and stronger overall financial results.
However, this is an area where investors must understand what they own. There are companies that have a high ESG score but they may not have much impact on the climate at all. If that is an investor’s primary focus, the company may not align with their values. Or an investor may be highly concerned about equity among the management team, but a company might have a high ESG rating for other reasons.
What is Greenwashing and How Does it Affect ESG Stocks?
Greenwashing is the practice of communicating false or misleading information about the environmental benefits of a company’s products. This doesn’t mean that the claims aren’t true in some fashion. The intention is that the company tries to make their claims sound better than they are.
If "greenwashing" makes you think of "whitewashing," that’s intentional. The term was coined as an environmental twist on the conventional term. Whitewashing refers to the practice of providing misleading information to gloss over bad behavior. Greenwashing doesn’t mean a company hides bad behavior — they embellish “good” behavior to materially impact their share price.
In response to greenwashing, the United States Federal Trade Commission (FTC) has enacted laws to punish companies that engage in greenwashing. Furthermore, the agency has issued guidelines to help consumers understand the claims that companies make. Some of these include:
- Any “green” claims need to be explained clearly and visibly on a company’s packaging and advertising.
- A claim needs to be specified as being attributable to the product itself or the packaging of the product and to the extent of the claim being made.
- Claims should not be overstated.
- Substantiation needs to be supplied for any competitive claims.
Consider ESG Investing for Your Portfolio
ESG stocks are the inverse of "sin stocks." In the 1980s, the term “sin stocks” was coined to describe companies who sold products tied to popular vices. Tobacco stocks fall under the list of sin stocks as do stocks of companies who sell alcoholic beverages. The list also includes gambling stocks, stocks linked to adult entertainment, and in the last decade has expanded to include marijuana stocks.
As an investment strategy, investors chose to invest in their values by avoiding placing these stocks in their portfolio. This included putting pressure on fund managers to design funds that didn’t include these funds as part of its holdings.
However, while sin stocks helped provide a framework for what many investors were against, it didn’t express what they were for. That’s where ESG stocks come in. Here investors can contrast what companies they won’t invest in against the companies they will invest in.
The climate emergency and the rising importance of diversity and equity have prompted many companies to make ESG central to their business strategies.
Not only can this be seen as socially responsible, but companies that embrace ESG ideals have been shown to retain employees, have more loyal customer bases and may ultimately outperform their rivals over the long run. All of these factors, in addition to ESG and stock performance, make them a viable consideration for any portfolio.
Learn more: How to Find Undervalued Stocks