What's the projected lifespan of your investment account? For most of us, it's measured in decades, or possibly even generations if you're building a legacy. The investments that'll carry you through -- the stocks of the future -- are the companies that are working now to extend their competitive advantage in the years ahead.
Every leadership team has its own way of managing for the future. But there's one general approach that can create competitive advantages for nearly any type of business. It involves seeking out and eliminating unsustainable business practices, before they become obsolete or damaging to the business or its stakeholders.
You might associate corporate sustainability efforts with the environment, and you wouldn't be wrong. That's only part of the equation, however. Investors reward companies that address sustainability from three angles: Environmental, social, and governance, commonly abbreviated as ESG. Sustainable social practices promote equal opportunity, worker safety, career development, human rights, and positive community impact. Governance addresses executive compensation, board diversity, business ethics, and political activity.
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ESG companies: Managing for today and tomorrow
The best corporate leaders can pursue those sustainability initiatives without sacrificing current-year profits or performance. This is a fundamental concept of ESG investing, which incorporates a company's record on ESG factors in investing decisions, alongside traditional financial analysis.
ESG investors believe the stocks of the future are companies that perform well today, even as they pursue sustainability. For example:
- Chipmaker NVIDIA (NVDA 3.71%) earns high ESG marks for achieving pay equity, aggressively pursuing gender diversity, and improving energy efficiency in its data centers. Over the last three years, NVIDIA has grown its operating income by 12.18%.
- Retailer Best Buy (BBY 1.09%) is another ESG favorite. In 2020, the company partnered with a solar energy developer and S. Bank to open the Best Buy Solar Field, collected 204 million pounds of recyclable electronics and appliances, and confirmed that 98% of its private label suppliers have ethical business practices. Best Buy's annualized operating income growth over the past three years is 12.59%.
- Syringe maker West Pharmaceuticals (WST -4.55%) also has a solid ESG record. Highlights include improving its safety record by 66% between 2015 and 2019, working with partners to repurpose rubber waste into new products, and reducing water consumption by nearly 4% in 2019. The company has grown its operating income by 22.51% over the last three years.
ESG initiatives and financial performance
In theory, ESG initiatives should pay dividends over the long term. Lower energy consumption, for example, reduces costs both now and later. Pay equity, employee safety, and career development programs improve employee motivation and attract the best talent. And enforcement of ethical business practices helps minimize fines, penalties, and other regulatory actions.
A growing body of research, though, indicates that ESG initiatives can improve a company's bottom line and lower downside risk for investors in the short term. One report from 2015 reviewed more than 2,200 ESG studies to find that 90% of them confirm either a positive or neutral link between ESG and financial performance. More recently, published reports from Goldman Sachs, Morgan Stanley, Bank of America, BlackRock, and others have concluded that ESG is driving better business performance now.
How to find ESG stocks of the future
You can find appropriate ESG investments by researching MSCI ESG ratings and reviewing annual corporate ESG reports. MSCI ESG ratings range from CCC at the low end to AAA at the high end. You can look up 2,800 different companies by ticker to see where each leads and lags in its ESG efforts.
To get more detail on a specific company, visit the investor section of its website and look for an annual ESG report. Nine of 10 companies in the S&P 500 publish their ESG highlights every year.
Alternatively, you can research ESG exchange-traded funds (ETFs) and mutual funds -- either to invest in those funds directly or to take a peek at their holdings for ESG stocks you might want to buy. Three low-cost ESG ETFs to check out are Vanguard ESG U.S. Stock ETF (ESGV -0.50%), iShares ESG Aware MSCI USA ETF (ESGU -0.44%), and SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX -0.46%).
Making the world a better place
As an investor, if you agree that ESG is good for business today, it's a no-brainer to incorporate ESG analysis into your decision-making. Even if you think ESG really only benefits future investment performance, there's still an argument to support companies pursuing sustainability -- because it feels good.
When you invest in ESG, you're contributing to a healthier planet, better work environments, and more transparent corporate practices, among other things. It's like saving the world and securing your own financial future at the same time.
