Introducing the Kiplinger ESG 20
Kiplinger's Personal Finance|November 2021
Our picks have profit potential and are tackling today’s environmental, social and governance challenges.
NELLIE S. HUANG and ADAM SHELL

This month we’re introducing the Kiplinger ESG 20, the list of our favorite stocks and funds that excel at meeting environmental, social, and corporate governance challenges. Buying stocks or funds that are planet- and people-friendly is becoming as important a goal among investors as saving for retirement. In response to crises tied to climate change and the global pandemic, as well as to pressing social issues such as income inequality and the push for racial justice, more investors are embracing the ESG investing movement in a bid to drive change and make the world a better place.

People who want to align their investments with their values seek businesses that not only focus on increasing profits for shareholders but also take steps to protect the planet, boost the well-being of their employees, keep customers satisfied and safe, and assist communities in need. Money invested in ESG funds could jump nearly sixfold this decade, to $1.2 trillion, projects BlackRock, the world’s largest money management firm.

You don’t have to sacrifice returns to jump on the ESG train. The S&P Composite 1500 ESG index, a broad measure of ESG-focused stocks covering U.S. companies of all sizes, returned 36.4% over the past year—barely a hair less than the 36.6% return of the S&P Composite 1500, its non-ESG cousin. Over the past three years, the ESG index has returned an annualized 18.6%; besting its counterpart’s 17.2% average yearly gain.

The ESG challenge. Because it’s harder to quantify non-financial ESG factors, such as a company’s carbon emissions or its record on board diversity, than it is totally annual revenues or calculates a price-earnings ratio, identifying promising investments through a sustainability lens can be as tough as pinpointing where a Category 5 hurricane will make landfall. An explosion of ESG ratings, rankings, and reports add more complexity than clarity, given that criteria are continually evolving, reporting isn’t standardized and U.S. regulation is nascent.

Enter the Kiplinger ESG 20. To come up with our list, we reviewed ratings on individual stocks and funds published by leading ESG rating firms such as MSCI, Sustainalytics, and Institutional Shareholder Services, among others. We then interviewed fund managers, ESG investing experts, Wall Street analysts, and company representatives. Finally, we did our own research to identify sustainable investments that possess a winning combination of strong ESG credentials along with solid business fundamentals and growth potential.

Our list is broken down by category: stocks fall into the Environmental, Social or Governance group; funds cover any or all of the bases. Few firms exceed on every ESG metric, but we tried to select all-around good corporate citizens. Says Cheryl Smith, comanager of Green Century Balanced fund: “No company is perfect.” (Returns and other data are as of September 10.)

ENVIRONMENTAL STEWARDS

Increasingly, climate risk poses investment risks. But climate change also presents opportunities for innovative, sustainably-minded companies designing products that solve or mitigate environmental ills such as air and water pollution, depletion of natural resources, or outdated power grids. Companies in this group are judged on the impact they make on the environment and how well they manage that impact. The five stocks below shine in a bright shade of green.

FIRST SOLAR

Renewable energy sourced from the sun using solar panels is an ally of the clean energy revolution. First Solar is a leading maker of photovoltaic solar panels, which convert sunlight into electricity with no carbon emissions. “If you’re looking at stocks from an ESG perspective, focus on ones like

First Solar, with technological solutions that are helping to stabilize the world,” says Garvin Jabusch, manager of Shelton Green Alpha fund.

Demand for solar-driven power is rising. First Solar’s sales in the first half of 2021 were up 22% compared with the same period in 2020. And President Biden has put forth a plan that calls for solar energy to power nearly half the electric grid by 2050, up from 3% now. The Solar Energy Industries Association projects that over the next 10 years, U.S. solar capacity will grow to be three times greater than it is now.

The stock, which has lagged the S&P 500 so far in 2021, is in a good position to rebound.

MICROSOFT

The second-biggest U.S. stock by market value is unarguably green. Over the past decade, Microsoft’s ambitions have shifted from its Office software to its cloud-based data centers to make sure that the environment has a sustainable future. While many companies are still racing to get to carbon neutral (a goal the tech giant achieved in 2012), Microsoft last year set a new, ambitious goal of being a carbon-negative company, which would mean removing more carbon dioxide from the atmosphere each year than it emits.

By 2050, Microsoft hopes to remove the equivalent of all the carbon it has emitted since its inception in 1975. “Microsoft is a model corporate citizen in the environmental ESG pillar,” says Joe Reiland, comanager of the American Century Sustainable Equity fund.

Thanks in large part to its fast-growing cloud business, Microsoft is firing on all cylinders. In its fiscal 2021 year that ended June 30, sales rose 18% from a year earlier, and the company expects double-digit sales and profit growth in fiscal 2022. The stock, up 45% in the past year, is still a Wall Street favorite, with 32 of 38 analysts that cover it rating it a “buy.”

PROLOGIS

Building, buying, and leasing green buildings, warehouses, and fulfillment centers is a red-hot business for Prologis, a logistics-focused real estate company. Prologis builds energy-saving logistics facilities with sustainable features such as rooftop solar panels, LED lights, and low-emission heating and cooling systems—facilities that are now in demand from giant retailers that store inventory there, such as Amazon.com and Walmart.

All that energy efficiency confers a green cast on tenants, too. “It helps all of Prologis’s customers advance their sustainability goals,” says Scott Renze, senior investment analyst at American Century Investments.

Prologis also benefits from the key locations of its facilities, close to population centers—which means a shorter, quicker and less energy-intensive delivery distance for tenants to cover. “We are committed to doing right by the places where we live and work,” says Ed Nekritz, Prologis’s head of ESG and chief legal officer.

Research firm CFRA rates the stock a “strong-buy.” Deutsche Bank upped its 12-month price target on the shares from $126 to $150, suggesting a gain of 12% from recent levels.

VESTAS WIND SYSTEMS

Wind is a way to a greener grid, and the turbines that Vestas Wind Systems makes turn wind energy into electricity. During their lifespans, the company’s wind turbines, which are installed onshore and offshore, emit less than 1% of the carbon emissions of conventional energy sources, according to Vestas’s 2020 Sustainability Report. The firm cuts down on its own carbon emissions by using 100% renewable energy at its plants and by recycling most turbine components—the goal is to become carbon neutral by 2030.

Vestas had a record wind turbine order backlog valued at $25 billion at the end of June. The company is also bulking up its services business, which generates revenue from servicing turbines made by other companies, and it’s working to expand its offshore business, which accounted for 16% of revenues in the first half of this year.

The stock has lagged the S&P 500 over the past year. But as the economy transitions to wind power, “you want to own the leaders like Vestas,” says Shelton Green Alpha’s Jabusch.

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