Johnson Controls (JCI 0.15%) is already entrenched as an ESG company. Its fiscal third-quarter results showed nice revenue gains and margins hampered by the same supply chain constraints and labor shortages that have plagued many businesses this year.

But what is surprising to some investors is that, when you take a closer look at how it's operating and how well it's producing, you can see the company has a very exciting long-term opportunity ahead of it. Let's dive in.

Johnson Controls is a diamond in the rough

Johnson Controls posted fiscal Q3 earnings earlier this month and a glance at the data released showed solid performance. The report included an 8% increase in organic revenue and a 3% jump in adjusted earnings per share to $0.85. Digging deeper, though, and it becomes clearer that the company made significant advancements in its digital transformation into an ESG enabler. ESG stands for environment, social, and governance, and it involves a theory for evaluating a corporation based on goals that go beyond the role of a corporation to maximize profits on behalf of the corporation's shareholders. It takes into account things like climate improvement, workforce equity, and fair executive management.

A person looking at a screen containing ESG-related icons.

Image source: Getty Images.

Underlying Johnson Controls' ESG initiatives is its OpenBlue digital platform. The platform helps companies and property managers create smart buildings. The term "smart" seems to be used indiscriminately nowadays, so let's add some context. The OpenBlue software platform remotely monitors the moving parts of furnaces, boilers, refrigeration units, and air conditioning units for defective performance. By monitoring the equipment, Johnson Controls can diagnose problems immediately and make users aware that their units need repair or preventative maintenance. Perhaps more importantly, the system can also monitor air quality inside buildings.

Traditionally, building owners don't know something is wrong until the heating or cooling problems are noticeable by tenants or the air quality gets so bad that they get a complaint. Predictive maintenance keeps equipment up and running more reliably and reduces energy wasted on broken-down or increasingly inefficient components. In addition to improving the environment, customers report higher tenant satisfaction and cost savings.

Johnson Controls has a long list of customers that use its building solutions. For example, healthcare facilities need to keep certain medicines cool and maintain air quality for patients. Property managers must also keep commercial and residential tenants comfortable or risk losing them. All of them are looking to improve their environmental impact.

Earlier this month, Johnson Controls announced that its OpenBlue platform helped Microsoft decrease its energy footprint on its Beijing campus. The installation achieved 98% uptime, cut energy costs by 27.5%, and is assisting Microsoft in reaching its sustainability goals.

OpenBlue benefits Johnson Controls and its shareholders in a couple of ways. First, it's a software-as-a-service offering for which the company receives a stable recurring revenue stream. Second, the platform is system-agnostic, meaning monitoring equipment can be applied to competitors' equipment too. When it comes time to repair or replace the equipment, Johnson Controls can use the data it collects to get a leg up on the competition and potentially sell new equipment.

Johnson Controls introduced OpenBlue in 2020. In the third-quarter report, the company said its attachment rate (or new equipment sold to OpenBlue users) had improved 270 basis points year to date. The platform helped to increase service orders by 20% in the two years since OpenBlue launched. Over that time, Johnson Controls has witnessed increasing growth in its backlog of service and installation orders.

Chart showing JCI's increasing backlog since 2020.

Image source: Johnson Controls.

Should you buy the dip on this ESG enabler?

For its ESG efforts, Johnson Controls has been recognized many times over. The company made the Forbes Best Employers for Diversity list, and Morningstar's Sustainalytics awarded  it the ESG industry Top Rated badge for strong ESG performance.

Like many companies, Johnson Controls blamed supply chain constraints, foreign currency erosion, and insufficient labor for margin contraction during the quarter. These issues have plagued stocks throughout 2022, and Johnson Controls is no exception. Share prices are down nearly 29% this year.

As evidenced by its constantly growing backlog, the decarbonization and greenhouse gas reduction megatrends are bearing fruit for Johnson Controls and could continue to in the long run. Investors have an excellent opportunity to buy the dip on Johnson Controls.