Environmental, social, and governance (ESG) investing is one of the hottest trends in the market. Also known as sustainable investing, the strategy involves selecting eco-friendly companies for the purpose of having an impact on things like global climate change and social inequalities.
ESG investing appears to be another trend that has been accelerated by the coronavirus pandemic—and it is expected to have plenty of staying power. According to Bloomberg Intelligence, ESG assets could account for one-third of global assets under management (AUM) by 2025.
An early pioneer in the ESG space was investment index and analytical tool specialist MSCI. Its ESG rating system is widely used a measure of a company’s ability to manage ESG risks over the long haul. Similar to a Moody’s or S&P bond rating, it applies letter grades that identify a company (or fund) as leader or a laggard when it comes to ESG issues.
With impact investing expected to gain momentum in 2022, many investors are looking to build their portfolios with ESG leaders that also have good upside. Here are three ESG-friendly stocks that can make a portfolio greener in more ways than one.
What is a Good Solar Energy Stock?
Solar energy technology powerhouse First Solar (NASDAQ: FSLR) is an industry leader based on MSCI’s ESG analysis. The favorable rating stems from the company having a top quartile performance in the environmental category. This relates to its “strong commitment to clean technology” and relatively low water scarcity risk exposure. First Solar also rates above average in terms of corporate governance for having a mostly independent board, strong management oversight, whistleblower protection, and audit compliance processes.
A major boost for First Solar’s ESG score came in April 2020 when it sold almost all its 10-gigawatt solar farm assets to focus on solar modules. The latest iteration of the models are said to be thinner and more efficient than competitor offerings. This is better for the environment and has First Solar in a more competitive position to benefit from increasing clean energy demand.
First Solar shares are down 27% since November 1st because of a third quarter earnings miss and persistent industrywide challenges such as the global semiconductor shortage. However, underlying demand is strong and at 21x earnings (versus the 34x industry average), the long-term outlook is bright for this ESG leader.
Is Carrier Global an ESG-Friendly Stock?
With indoor air quality, all the rage since the start of the pandemic, Carrier Global (NYSE: CARR) has been one of the more popular sustainable investing plays. The HVAC and refrigeration leader is also a leader according to MSCI’s ESG assessment because it outperforms peers on environmental and social issues.
In the environmental category, Carrier Global’s investments to develop clean technology that makes homes and workplaces healthier puts it ahead of the pack. It is aiming to lead the green building movement by devoting more resources to researching energy efficiency and environmentally friendly building technologies. Carrier helped found the U.S. Green Building Council, a non-profit committed to building design, construction, and operation sustainability.
Carrier Global also rates favorably when it comes to sell-side research firms. On Monday, the analyst at Barclays reiterated his buy rating on the stock and raised his price target to a Street-high $65. After a steady climb from March 2021 to August 2021, Carrier has been in a sideways pattern. Given the below peer group 21x P/E ratio, recent dividend hike, and share buyback program, look for the stock to (sustainably) build off the consolidation in 2022.
Is Weyerhaeuser an Environmentally Friendly Stock?
Weyerhaeuser (NYSE: WY) is one of the top real estate investment trust (REIT) stocks in MSCI’s ESG universe. The paper and forest products specialist is appropriately in favor with tree huggers because it scores well in raw material sourcing, toxic emissions, and water stress.
MSCI recently upgraded Weyerhaeuser’s ESG rating on account of improved water-related practices. The company plants up to 150 million trees and harvests just 2% of its forests each year. It has several environmentally friendly practices in place such as leaving tree buffers along waterways to protect aquatic life.
The country’s largest non-government landowner also outperforms its industry on social and governance matters. The board of directors has an independent majority, and the chairman and CEO roles are separate both of which are considered less risky corporate structures.
Last year was a major financial success for Weyerhaeuser thanks to surging lumber prices. After a sharp downturn during the summer, lumber futures are on the rise again with homebuilder demand strong and global supplies still constrained. This has Wall Street upwardly revising its earnings estimates in anticipation of another strong year. Weyerhaeuser’s ESG qualities, recovering dividend, and upside from volatile lumber prices, could produce some significant green for investors this year.