What is ESG? It stands for environmental, social, and governance, and it's a broad framework that helps companies track their impact beyond financial results. Organizations are typically shareholder-focused, but they face increasing pressure to operate for all stakeholders, including employees, customers, and the communities around them.
It's a movement designed to create a more equitable society and to ensure corporations aren't having an irreversible negative impact on the environment. Adoption of ESG initiatives will likely only accelerate as time goes on, and that spells one thing for investors: opportunity.
Tesla (TSLA 11.76%), Workiva (WK 0.03%), and Microsoft (MSFT 0.87%) are three ESG companies investors should buy for different reasons. Here's what they are.
1. Tesla: Driving green energy
Some investors might consider Tesla to be a controversial ESG pick because it was booted out of the S&P 500 ESG Index earlier this year. But many indexes measure ESG differently and place more weight on some metrics than others. In this case, Tesla fell short based in part on a series of jarring accusations by its employees about working conditions at its factories and for the way the company handled investigations into deaths involving its driver-assistance technology.
However, it's worth noting that Tesla is still part of other major ESG indexes, including the iShares ESG Aware MSCI USA ETF (ESGD 0.03%), where it's the fourth-largest holding. After all, Tesla has delivered electric vehicles to the mainstream consumer, which is a seismic green initiative.
Beyond producing the most popular electric cars, Tesla is also driving the residential green revolution with its solar roof and Powerwall storage products. Its storage solution is in such high demand from consumers that the company can't produce them fast enough and has dedicated a new manufacturing facility to focus on them specifically.
Between 2012 and 2021, Tesla's total solar panel deployments have generated more electricity than the company has consumed in all of its factories and by all of its vehicles. And in 2021 alone, Tesla's customers prevented the emission of 8.4 million metric tons of carbon dioxide. The company is also on a mission to run clean manufacturing processes, recycling the majority of its waste, and it can recycle 100% of any Tesla lithium battery that no longer serves a customer's needs. Additionally, Tesla uses less water per vehicle produced than almost any other carmaker in the world.
Tesla now has the capacity to produce 2 million electric vehicles each year, and it plans to grow that to 20 million by 2030, so its positive impact on the environment will continue to scale. From a financial perspective, the company could generate over $84 billion in revenue during 2022, according to analysts' estimates, plus it's highly profitable. With a long-term focus, investors could do very well buying Tesla stock here.
2. Workiva: Creating an ESG reporting framework
Workiva is very much an under-the-radar stock, but it shouldn't be. Not only is the company growing steadily, but it's playing an important role in over 5,300 organizations by aggregating their mountains of data. Companies often have remote or hybrid workforces in the digital age, which means tracking workflows across multiple cloud-based applications can be a difficult task.
Workiva integrates with dozens of leading software providers so companies can pull data directly from the source and place it all neatly within a single platform for clear visibility. Then, the company provides hundreds of reporting templates whether managers need to report to their executive team, to the Securities and Exchange Commission (SEC), or even to their stakeholders on ESG metrics.
Workiva is now intently focused on capturing the growing ESG reporting opportunity, which could exceed $5 billion in annual value by 2025. That's because, in some regions, like the United Kingdom, large organizations are already required by law to track and report on certain ESG metrics, and Workiva enables that whether they need to collate data on climate impacts, governance challenges, or even diversity.
Put simply, Workiva is a tool most companies will need in their toolbox if they want to take ESG tracking seriously. The company estimates it will generate $536 million in revenue during 2022, so based on the ESG opportunity alone, there's plenty of room for growth.
3. Microsoft: Using its dominance for good
Microsoft is a household name thanks to its Windows computer operating system and Office 365 digital document suite. But it's far more than that today, with an expansive presence in gaming, hardware, and even cloud computing services. Microsoft might be less known for its tireless efforts on the ESG front, yet it could be the best pick of this bunch.
Microsoft stock is the second-largest holding in the S&P 500 ESG Index behind its key rival Apple (AAPL 0.23%), and it's shooting far beyond the typical carbon-neutral goal most companies are striving to achieve. Instead, Microsoft intends to be carbon-negative by 2030, which means it will effectively remove more carbon from the atmosphere than it emits through its vast business operations.
By 2050, the company estimates it will have removed from the atmosphere all of the carbon it has emitted since its founding in 1975.
Since 2020, the company has had an internal carbon tax in place of $15 per ton, which gets invested in furthering its sustainability efforts. By 2025, Microsoft will run its operations entirely on renewable energy from its campuses to its data centers. And by 2030, it will have electrified its entire fleet of vehicles used in day-to-day business.
But Microsoft's technology might be its greatest asset in the climate fight. It has built a planetary computer containing petabytes of data accessible in the cloud, delivering the ultimate monitoring tool to climate scientists and conservationists.
If all of that isn't enough, Microsoft wants to be a zero-waste and water-positive company by the end of this decade. It's achieving all of this while performing like a powerhouse financially, generating over $198 billion in revenue during fiscal 2022, which ended June 30.
A combination of Tesla, Workiva, and Microsoft could make for a very green portfolio in the long run, both from an ESG standpoint and a financial standpoint, but Microsoft might be a notch above the rest.
