OUR ESG PICKS ARE THRIVING

Despite an ongoing backlash, our favorite stocks and funds focused on environmental, social and corporate governance issues had a good year overall.

- KIM CLARK AND NELLIE S. HUANG

WITH headlines trumpeting a widespread retreat from efforts to advance certain environmental, social and corporate governance goals, you might think that investors sticking with such values-based portfolios are falling far behind, too.

Wrong. Despite the backlash, most of the 15 stocks and five funds that Kiplinger has highlighted as ESG leaders have kept up with or beaten the broad market or their category peers over the past 12 months. Our portfolio of 15 stocks returned an average of 40.1% over the period, compared with 27.1% for the S&P 500. Ten of our 15 stock picks outpaced the index. Of our favorite ESG funds, three outperformed their respective peer groups; two funds lagged, including our sole fixed-income fund.

Consider the backdrop to these solid showings. U.S. investors have pulled approximately $19 billion from ESG-focused mutual and exchange-traded funds in the year ending July 31, according to research firm Morningstar. And several major money managers, including Goldman Sachs Asset Management, J.P. Morgan and Nuveen, have quit a group that was coordinating large investors to pressure companies to reduce pollution. Some regulators have also tapped the brakes on ESG efforts. The Securities and Exchange Commission in April delayed a new rule requiring companies to publicly report their greenhouse gas emissions and climate-related risks. The stay was sparked by lawsuits challenging the rule filed by several Republican attorneys general. And a few high-profile companies, including John Deere, Tractor Supply and Harley- Davidson, have recently rescinded “diversity, equity and inclusion” human resources policies.

But veteran ESG analysts say the current challenges may, in the end, have a beneficial effect by clarifying which companies are truly committed to what some are now describing with less politically charged terms, such as “sustainability” or “transition (to alternative energy) investing.”