Are these the top ESG stocks and ETFs to buy?
ESG investing seems set to move from strength to strength over the coming years. Learn more about some of the highest-rated ESG stocks and largest ETFs to watch, and find out how you can take a position.
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ESG investing: what you need to know
ESG investing is a strategy for choosing stocks and funds that takes environmental, social and governance (ESG) practices into account. It involves assessing how a business is affecting the planet, its societal impact and how it’s run.
The rising popularity of ethical and green investing has led more and more people to look beyond fundamentals when picking assets. But weighing up a business’ behaviour can be a tricky process – after all, there’s no single definition of what makes a ‘good’ company.
ESG is one method of assessing a stock beyond strict financial measures. It takes its practices into account as well, for a more cohesive view.
Most businesses will perform stronger against some aspects than others, so if you’re considering ESG then you’ll need to prioritise stocks that align with the values you consider most important. One way of achieving this is to use the ratings from an ESG agency to examine how a company is performing against individual criteria for each factor.
Alternatively, you can invest via exchange traded funds (ETFs) or other funds that use ESG factors as part of their asset allocation. But much like individual investors, fund managers have to choose which criteria they’re going to focus on. So the principle here is roughly the same as choosing stocks – read the methodology of a fund you’re interested in to see whether its ESG aims match yours.
But, please bear in mind that all investment incurs risk – risk that is only amplified when trading with leveraged derivatives like spread bets and CFDs. Ensure that you understand how they work and always take steps to manage your risk before opening a position.
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Largest ESG ETFs to watch
The below list is based on research released by MSCI ESG Research LLC in April 2021. The report names the 20 largest ESG funds rated by MSCI, but we’ve narrowed our focus exclusively to index-based ETFs.
|MSCI rating||Benchmark||Net assets*||Inception||MSCI ESG quality score**|
|iShares ESG Aware MSCI USA ETF||A||MSCI USA Extended ESG Focus Index||$21.1 billion||2016||6.7|
|iShares MSCI USA SRI UCITS ETF||AAA||MSCI USA SRI Select Reduced Fossil Fuel Index||$7.3 billion||2016||9.13|
|iShares ESG Aware MSCI EM ETF||AA||MSCI Emerging Markets Extended ESG Focus Index||$6.7 billion||2016||7.5|
|iShares Global Clean Energy ETF||AAA||S&P Global Clean Energy Index||$6 billion||2008||8.6|
|iShares Global Clean Energy UCITS ETF USD (Dist)||AAA||S&P Global Clean Energy Index||$5.7 billion||2007||8.63|
*As of 19 August 2021
** The MSCI ESG Quality Score (0 –10) for funds is calculated using the weighted average of the ESG scores of fund holdings. The score also considers the ESG rating trend of holdings and the fund exposure to holdings in the laggard category (companies lagging their industry peers based on a high exposure to, and failure to manage, significant ESG risks).
These are the five highest-rated stocks according to Corporate Knights’ ESG criteria, outlined in the Corporate Knights Global 100 report.
To create the report, Corporate Knights ranks listed companies around the world with over $1 billion revenue. They assess 21 ESG KPIs covering the management of resources, employees and finances, plus clean revenue and supplier performance. The report only takes publicly listed data into account.
Schneider Electric SA
Founded as Schneider & Cie in 1836, the company today focuses on providing energy and digital automation solutions to the residential, commercial and industrial sectors. It enjoys the distinction of being a Fortune Global 500 company, trades on the Euronext Exchange, and is a constituent of the Euro Stoxx 50 index.
One area of focus for Schneider Electric SA is the smart home – ie automated energy management based on the Internet of Things (IoT). The company believes legacy homes are ready for upgrades that’ll manage electricity better, source energy from sustainable sources and lessen their carbon footprints. Automated energy management systems may also become a regulatory necessity for new homes and businesses in the near future.
The business case for the concentration on sustainability seems strong: for example, the company’s data points to over $4.2 billion in property damages in the US and Europe due to faulty electrical wiring. Moreover, looming increases in the cost of electricity and the possibility of people spending more time at home due to the post-pandemic hybrid work model suggest that demand for Schneider’s products could remain strong.
Ørsted A/S is the largest power provider in Denmark. It was known as DONG Energy until 2017, when it changed its name because the old one was no longer correct. DONG stood for Danish Oil and Natural Gas, but the company has successfully moved away from fossil fuels in recent years. It no longer owns any oil or gas fields, has reduced its carbon emissions by over 80% since 2006 and has pioneered the use of offshore wind farms.
The company’s devotion to the environment saw Ørsted named the Corporate Knights’ best ESG stock in 2020. Although it has now moved to fourth position, its continued inclusion on the list means that Ørsted’s ESG commitment is for the long term. The company performs particularly well in terms of water productivity, waste productivity and clean revenue, which measures the portion of income that has a clear environmental benefit.
Banco do Brasil SA
Banco do Brasil is Latin America’s largest bank and the oldest active bank in Brazil.
Corporate Knights ranks Banco do Brasil as one of the three most sustainable companies in the world mostly thanks to how it treats its employees and the comparatively high rate of tax it pays (27%).
Banco do Brasil’s chief executive officer (CEO), Rubem Novaes, earns just 11 times what the average worker at the company does. Workers also get access to a healthy pension fund. Perhaps unsurprisingly, the company has a low employee turnover rate of a little over 2%.
Banco do Brasil is controlled by the Brazilian government, but its stock trades on the Sao Paulo Stock Exchange.
Neste is an oil refining and marketing business in Finland, and the world’s largest producer of renewable diesel.
Neste scores highly in Corporate Knights’ ‘Innovation Capacity’ rating – which measures research and development spend – and thanks to the gender diversity on its board. 2021 marks the 15th consecutive year that Neste has featured on the Corporate Knights Global 100, which is longer than any other energy company.
Shares in Neste trade on the Helsinki Stock Exchange, and over the past two years have shown strong positive growth.
Founded by the first Canadian to earn a PhD in environmental engineering, Stantec offers professional consulting services in planning, engineering, architecture, interior design, landscape architecture, surveying, environmental sciences, project management, and project economics for infrastructure and facilities projects. It’s headquartered in Edmonton, Canada, and has offices on six continents.
The company’s success in the Corporate Knights’ Global 100 is in large part based on its scores for clean revenue and clean investment. These are goods and services that have a clear and positive impact on both the environment and society.
Stantec’s ratings on the metrics were the highest in the consulting and professional services industry group. It also scored well on a number of other factors related to employee benefits and compensation. The company trades on the Toronto Stock Exchange (TSX) as well as on the NYSE. Over the past two years, Stantec’s share price has been consistently bullish.
ESG investing outlook
KPMG estimated that a quarter of all professionally managed investments in 2017 were in ESG. It has only grown in importance in the years since, and there’s no sign that it’s going anywhere.
Divesting from fossil fuels is quickly becoming standard practice – BlackRock’s CEO, Larry Fink, announced the firm would limit investment in coal in its active funds in 2019. Climate change dominated the headlines in early 2020, thanks in part to Australia’s raging bushfires.
So the environmental side of ESG is likely to see strong growth in 2021 and beyond. Social and governance are likely to see progress as well, thanks to headlines such as Goldman Sachs tightening its diversity requirements for initial public offering (IPO) clients.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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