When people think of ESG, the word "environment" usually leaps to mind. And that's understandable. ESG stands for environmental, social and governance. It's a group of nonfinancial factors that have grown increasingly important to investors, regulators and the general public. But environmental factors are only a part of the story — especially when it comes to finding the best ESG companies.
This past year, extreme weather events have elevated environmental concerns. Social challenges — diversity, human rights and workplace issues — have become more significant as employees return to the office. Consider this year's labor actions, from the SAG-AFTRA strike to the United Auto Workers' walkout. The UAW doesn't oppose the shift to electric vehicles, but is concerned about the transition's impact on workers.
And all year long, companies have been waiting for the SEC to issue new climate disclosure rules. The implementation timelines are opaque, and litigation is almost assured. However, the new rules will place significant reporting obligations on companies and bring a sense of urgency to their ESG strategy planning.
Helping Investors Find The Best ESG Companies
The many factors that go into ESG rankings can make for surprising and confusing lists. A company may excel in one ESG dimension, such as leadership and governance, but rank poorly for its environmental efforts.
The energy transition is here. Dow Jones — IBD's parent company — says investment managers in the U.S. will increase the percentage of ESG-related investments in their portfolios substantially in the next couple of years. By 2025, 11% to 15% of U.S. managers will put 40% of their portfolios in ESG investments.
How can investors protect their portfolio and accurately value the companies poised to profit from ESG excellence?
Finding the best ESG companies requires study. Investor's Business Daily can help. We've compiled our fifth annual ESG Investing special report. Public companies that made our 2023 100 Best ESG Companies list combine high Dow Jones sustainability scores with superior IBD technical and fundamental stock ratings. They are standouts for ESG investing.
Best ESG Companies: Meet The Top 3
Topping the list this year is Microsoft. Applied Materials took second place. In third place is Woodward. All 100 companies on our 2023 list ranked at the top of Dow Jones ESG scores and had an IBD Composite Rating of 81 or better (on a scale of 1 to 99) as of Aug. 25. These companies also met or beat the S&P 500 over the past five years. To check current stock ratings and charts, visit IBD's Stock Checkup page.
Verisk Analytics and Mastercard finished fourth and fifth, respectively, on this year's IBD Best ESG Companies list.
Read our profiles and interviews on the top-scoring companies:
- Microsoft: This 'Magnificent Seven' Stock Also Is The Best ESG Company
- At Applied Materials, Cutting Carbon Emissions Is A Team Effort
- Woodward's Focus On Energy Pays Off with High ESG Score, Strong Stock Performance
Tech Stocks Dominated in 2023
Technology companies, especially software providers and semiconductor manufacturers, nabbed 11 of the top 25 slots on our list of 100 Best ESG Companies this year.
Among the reasons for that, tech stocks revived after a sluggish 2022. The Technology Select Sector SPDR ETF has more than doubled the S&P 500's return so far this year.
Also, tech companies focus on more than measuring and managing their own ESG factors. Many also provide products and services to help companies in other sectors do that.
Microsoft, our No. 1 company, says it's helping its customers build sustainable solutions and reliably measure and report on progress. It's also advocating for global policies that it believes will benefit the environment and combat climate change. Microsoft also ranked highly on our list of 3 best companies in 8 industry sectors, as well as on our list of top-scoring companies in 5 sustainability dimensions.
ESG reporting is emerging as a key tool for companies and investors to demonstrate their commitment to sustainable practices and climate change mitigation, says Ricardo Aceves, former deputy research director for ESG Investing and Sustainability at Dow Jones.
DJ's proprietary data reveals "a global trend wherein companies are increasingly focusing on reporting how they address the risks and opportunities arising from their exposure to the impacts of climate change," he said.
Several factors contribute to the growing interest in ESG reporting, he says. They include rising public awareness of the effects of extreme weather conditions and investors' increasing recognition of the financial risks associated with climate change. Regulatory pressures mandating ESG performance disclosure, and the desire to build a competitive advantage, also play a part.
Investors Still Focus On Economy, Personal Finances
Extreme weather events, war, oil prices, SEC regulation and ESG scores may loom large for companies. But worries about the economy and personal finances overshadow investor concern about the climate.
In a September IBD poll, the percentage of investors who think it's important to invest in companies that align with their values was much lower than last year, down to 66% from 77%. More than half said they aren't familiar with ESG investing.
"The assumption is that using ESG as an investment screen is just philanthropy, but it truly is not altruism," author and sustainability expert Andrew Winston writes for the MIT Sloan Management Review. "The investors that get it understand that ESG gives a critical view on the risk of a business and helps gauge how resilient or ready for a low-carbon future a company might be."
Impact Of The SEC Climate Disclosure Rules
The new SEC climate-disclosure rules will likely present a major challenge to public companies.
"With these regulations, companies will need to expedite their capabilities for collecting, managing and measuring ESG data," said Dow Jones' Aceves. "They must swiftly transition to producing investor-grade reports containing nonfinancial information concerning climate risks and carbon emissions."
The timeline for implementation of the rules is "only a best estimate, as the regulator needs to address certain aspects of the proposal that may be challenging to implement," Aceves said. These include the 1% materiality threshold for financial disclosure, known as a bright-line test, and the disclosure of Scope 3 emissions.
The Greenhouse Gas Protocol — which provides accounting standards for greenhouse gas emissions — categorizes GHG emissions into three scopes.
Scope 1 covers direct emissions from owned or controlled sources.
Scope 2 covers indirect emissions from the purchase and use of electricity, steam, heating and cooling. By using the energy, an organization is indirectly responsible for the release of these GHG emissions.
Scope 3 includes all other indirect emissions that occur in the upstream and downstream activities of a business. Those emissions could be, for example, business travel and waste disposal.
Litigation will surely follow as the rules are challenged. Aceves also said: "Against the backdrop of the presidential election next year and some Republican politicians' campaign against ESG, the SEC is likely to face increased political volatility at best."
California beat the SEC to it, though. Gov. Gavin Newsom recently signed the state's new Climate Corporate Data Accountability Act. It requires U.S. companies with annual revenue of $1 billion or more to report both their direct and indirect greenhouse gas emissions starting in 2026 and 2027.
ESG Investing: Best Companies Methodology
To build the 2023 100 Best ESG Companies list, we started with each company's environmental, social and governance (ESG) sustainability score created by Dow Jones Newswires, an IBD affiliate. These scores capture a broad spectrum of information on the ESG profile of more than 6,000 global companies.
On Aug. 24, IBD asked Dow Jones for an ESG-scored list of all the U.S.-traded companies it tracks, a total of 2,067. We then cut the list to 1,559 companies on Aug. 25 by removing nonpublic companies and companies with stock prices below $10 a share. Any companies that lacked sufficient data to create an IBD Composite Rating were also removed from the list.
We further qualified the ESG investing list by removing those companies that did not meet or beat the S&P 500 in the past five years. We selected the 100 with the highest IBD Composite Rating — all with scores of 81 or better. To break any ties, we looked at companies' Relative Strength Rating and then, if needed, their EPS Rating. Finally, we ranked the 100 companies by Dow Jones' ESG score.
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