The term ESG stocks has become synonymous with doing good. But given that ‘good’ means different things to different people. So, there’s no one-size-fits-all ESG solution. There are plenty of so-called sustainable stocks out there with terrible ESG scores. Tesla (NASDAQ:TSLA) is a great example of this. Sure, the company’s electric cars are seen as a positive step toward combatting climate change. However, the company’s treatment of its employees and gaps in its governance means the company ranks relatively low when it comes to ESG.
Perhaps the most important thing to remember when looking at ESG metrics is that the score alone means very little. Instead, you have to compare it to similar companies in the same industry. Comparing the ESG score of an oil major to a tech company, for example, will tell you very little since the two have completely different ESG risks. Location is another factor to take into account.
Companies with a large presence in Asia often come with a larger dose of risk. That’s because regulatory oversight is less stringent.
So how do you choose the top ESG stocks? Many investors take a best-in-class approach, with representation from all types of industries (yes, even the so-called dirty ones). They compare a company’s management of its ESG risks to find the best pick. For others, it’s important to choose a company whose products are making a difference. In this case, you should be looking for a reasonably high percentage of revenue coming from sustainable products. Finally, there are those who want to avoid troublesome industries altogether.
For these investors, the pool of stocks is relatively limited, but they’ll find the tech sector offers several picks that rank well in terms of ESG.
Look in just about any sustainable fund holding ESG stocks and you’re likely to see a relatively hefty position in Microsoft (NASDAQ:MSFT). That’s because these funds are looking to track alongside larger benchmarks, and in the absence of some of the dirtier players, they end up overweight in big names like Microsoft with innocuous ESG scores. There are many who argue this is somewhat of a loophole in ESG investing, and in some ways they’re right. But in the case of Microsoft, ESG risk management is strong and the tech giant isn’t a bad pick for investors trying to do more with their money.
What’s good about Microsoft is that the company’s dedicated to cleaning up its own business as well as offering solutions to help others. The group’s pledged to remove more carbon than it emits by 2030, and by 2050 it says it will have removed more carbon that it’s ever emitted. Notably, this includes the emissions created by the supply chain. This ambitious goal shows Microsoft is committed to net zero, an attractive prospect for sustainable investors.
If you’re looking for ESG stocks that are actively making a difference in the world, the most important thing to look for is how much of the business is dependent on “clean” revenue. Companies that disclose this, and include a growth target, are on the right track. Irish auto part-maker Aptiv (NYSE:APTV) fits into this category. Around three-quarters of the group’s revenue comes from products designed to increase fuel efficiency or reduce emissions. This not only helps from an environmental perspective, it also represents a huge growth area as we head toward a lower-carbon future.
There’s more to like about Aptiv other than it’s efforts to bring down emissions. The group’s also involved in making technology that’s likely to explode in popularity as cars get more connected. That means things like autonomous driving, driver assist systems and even electrical distribution systems to support hybrids and electric vehicles.
Air Products (APD)
Another way investors might invest with purpose through ESG stocks is to look for companies working on new technologies that will support a more sustainable future. Chemicals company Air Products (NYSE:APD) is one such pick. The group is best known for its extensive industrial gas business, which comes with reliable, predictable revenues and a hefty dose of security.
But the group’s also funneling some of its cash into high-growth areas like green hydrogen. Air Products is already a leader in the chemical industry, so the leap to green hydrogen production isn’t all that unexpected. This is set to be a huge growth area as we shift toward a lower-carbon future, making it an investment worth considering.
On the date of publication, Marie Brodbeck held MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.