Should Your Portfolio Contain More ESG Stocks?

Should Your Portfolio Contain More ESG Stocks?

Howdy folks, 

It seems like everywhere I look these days, people are asking about ‘ethical’ or ESG stocks.

ESG = Environmental, Social, Governance.


Image source: GYC

It’s gotten to the point that I was surprised to read an article recently about the ethical concerns surrounding buy now, pay later (BNPL) stocks.

“But that’s just a normal financial service, right? It isn’t hurting anyone?”

Well, according to the piece, profiteering off of the encouragement of consumer debt is a big no-no for many investors — sorry Affirm!

This article got me thinking though. If even seemingly innocuous businesses can be considered unethical, then maybe I should be putting more thought into my portfolio. After all, there is considerable research to back the idea that ESG-compliant companies perform better as a whole. 

Below are some stats from asset management fund Arabesque and S&P Global Market Intelligence:

  • Between 2014 - 2018, high ESG scoring companies saw returns outperform their lower-scoring counterparts by 25%.

  • In the first year of the COVID-19 pandemic, out of 26 ESG funds, 19 performed better than the S&P 500.

  • These ESG funds increased between 27.3% and 55% over that year compared to the S&P 500’s 27% gain.

  • ESG funds have a significantly lower risk of scandal-induced financial repercussions. 

So, this all looks pretty good. But how do you measure a company’s ESG score?

Well, a company’s Yahoo Finance page will give you some detail in the ‘Sustainability’ tab. Take the Tesla sample below:


Looks like old Elon might want to brush up on Tesla’s labor standards. 

I suppose the next question then is who exactly is governing this ‘score’? Several organizations set the standard, but these are the biggest standards boards:

So far, you’re probably thinking one of two things:

  1. ESG stocks seem like a no-brainer, you should only invest in them. 

or 

  1. This is too good to be true. 

Neither are correct and ESG isn’t an exact science. After all, Under Armour has a great ESG score, but that doesn’t mean you should just blindly invest. Meanwhile, Disney’s ESG is pretty abysmal, but I still rate it as a top investment — one that I do hope will change its ways. As such, there are plenty of risks to banking on a company’s ESG score alone. 

  • There’s no universal standard, which leads to inconsistency in what is considered ESG compliant.

  • As a relatively new concept, we don’t have enough long-term data to prove that stocks that score high on ESG are indisputably superior.

  • No rules actually force companies to report ESG scores. They could simply stop, and we’d be none the wiser. 

So, where should you go if you want to buy more ‘ethical’ stocks? 

MyWallSt is a good start, as ESG plays a large part in how we hand-pick the companies in our shortlist (so much so that some big names may be in our bad book right now for unethical behavior — but more on that in 2022). 

The top industries for ESG stocks though are:

  • Renewable energy: environmentally friendly stocks are always a good start. 

  • Solar energy: kind’ve cheating as it’s basically the same as above, but they usually rank pretty high. 

  • Tech: surprisingly, the majority of top-ranked ESG stocks tend to belong to tech. 

  • Infrastructure: energy, water, passengers, storage, data, and more — there’s plenty to go on here. 

Happy hunting. 

JamieJamie

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