Steady Rise in ESG Investing to Boost These 5 Stocks

Environmental, social and governance (ESG) investing has witnessed explosive growth in recent years. While the economies across the globe collapsed last March as countries issued lockdowns due to the health scare, ESG-focused investing kept growing. In fact, investors poured in a record amount of money into ESG investing last year. Per a CNBC article, U.S. sustainable funds attracted $51.2 billion in 2020, which is more than double of the record set in 2019 of $21.4 billion, according to a Morningstar report.

The coronavirus pandemic also underlined the “S” in ESG, i.e., the social side of businesses’ conduct. It emphasizes on how companies work along with their employees, customers, shareholders and the community as a whole. Investors had parked money in companies that could manage the government’s directed reduced working hours, and can lower employee count without trimming employees or slashing wages. While several companies managed to win the “social” battle, the concern now falls back on the environmental aspect of ESG.

Climate Change Adaptation Boosting ESG Investing

Climate change has become a mega problem and the world is now at the dawn of a new industrial revolution. This new revolution binds technology advancements and proper usage of energy. From electric vehicles to energy storage, businesses globally are trying to deal with climate change, the pandemic and threats that may pop up in the future.

According to clean energy analysts of BloombergNEF, globally, a record $501.3 billion was committed to decarbonization in 2020, per a Forbes article. Clean power generation and electric transport saw heavy inflows last year and the trend is here to stay. In the United States, government has taken up climate change as a major area of focus for the coming years. Companies are being advised to make climate-related disclosure. This will help climate scientists and analysts to predict the businesses’ impact on the environment. These analysts can then formulate plans for managed retreat (to move back from coastlines as water levels continue to rise), gauge on water availability, agricultural production, human health and so on. Additionally, these climate analysts can help mitigate these problems and help adapt to profound changes in climate and severe weather that may become the "new normal" in the coming century.

President Joe Biden’s administration plays a prime role in promoting ESG investing. Biden has made climate change a major theme of his presidency and since the election, renewables and fossil-free assets have outperformed the broader market.

Several companies have now accepted climate change adaptation as vital and started taking productive steps. They are following guidance issued by the Task Force on Climate-Related Financial Disclosure (TCFD) regarding scenario planning and hence are including ESG factors.

Aggressive Change in US Energy Industry

When it comes to climate change concerns, the energy industry has often been slammed for its massive impact on the environment. Carbon, which is a byproduct of fossil fuels, accelerates climate change. So, when it comes to ESG, its relevance in the oil and gas industry could appear to be unsuitable at a first glance. But during the pandemic, there was a plunge in oil prices resulting from lower demand. Both consumers and investors were looking for cleaner energy sources. This pushed oil and gas companies to start looking for sustainable ways for energy extraction/production to become greener and retain relevance.

Occidental Petroleum is one such company that has set a goal to produce net zero carbon oil over the next 15 to 20 years. The company plans to become a carbon management company and will be helping other companies reduce carbon. Occidental has planned to take carbon from two ethanol plans and also plans to take carbon dioxide from a steel plant in Colorado and put it away in the Permian.

Overall, the oil and gas industry is calibrating itself to become net-zero carbon by 2050.

5 Stock Picks

Companies are prioritizing environmental and social values, and investors can now force companies to consider more than just their bottom lines. Given such a scenario, ESG investing will continue its northward momentum and these five stocks hold potential for growth. These companies sport a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

NVIDIA Corporation NVDA operates as a visual computing company. The company focuses on human capital development that includes professional development courses, tuition reimbursement, a career services program and more. On the environmental side, Nvidia has achieved a 30% energy efficiency target in GPUs for data centers.

The company’s expected earnings growth rate for the current year is 32.7% compared with the Zacks Semiconductor - General industry’s projected earnings growth of 14.9%. The Zacks Consensus Estimate for this company’s current-year earnings has been revised 15.1% upward over the past 60 days.

Microsoft Corporation MSFT develops, licenses and supports software, services, devices and solutions. The tech giant has been carbon neutral across the world since 2012 and commits to being carbon negative by 2030. Microsoft is investing $50 million in “AI for Earth” to accelerate innovation by putting AI in the hands of those working to directly address sustainability challenges.

The company’s expected earnings growth rate for the current year is 27.4% compared with the Zacks Computer - Software industry’s projected earnings growth of 2%. The Zacks Consensus Estimate for this company’s current-year earnings has been revised 9.1% upward over the past 60 days.

EMCOR Group, Inc. EME provides electrical and mechanical construction, and facilities services. The company’s experts provide environmentally-sound approaches to construction, site planning, materials, building upgrades, and energy management. It offers Mesa Energy Systems (Mesa) that is environmentally friendly, polypropylene piping for the condenser water loop, that is resistant to corrosion, abrasion, and chemical breakdown, and engineered for a 50-year lifecycle.

The company’s expected earnings growth rate for the next quarter is 9% against the Zacks Building Products - Heavy Construction industry’s projected earnings decline of 46.6%. The Zacks Consensus Estimate for this company’s current-year earnings has been revised 3.1% upward over the past 60 days.

West Pharmaceutical Services, Inc. WST designs and produces containment and delivery systems for injectable drugs and healthcare products. The company’s sustainability program is designed to target reduction of CO2 emissions, waste and increased recycling as well as energy and water usage.

The company’s expected earnings growth rate for the current year is 21% compared with the Zacks Medical - Dental Supplies industry’s projected earnings growth of 19.3%. The Zacks Consensus Estimate for this company’s current-year earnings has been revised nearly 11% upward over the past 60 days.

Texas Instruments Incorporated TXN designs, manufactures and sells.  The company’s operations require the use of raw materials, chemicals, energy and water. It has set voluntary reduction goals which comprise investment in new abatement technologies and the reuse and recycling of water when feasible.

The company that belongs to the Zacks Semiconductor - General industry has an expected earnings growth rate of 12.1% in the current year. The Zacks Consensus Estimate for the company’s current-year earnings has been revised 14.4% upward over the past 60 days.

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