ESG investing means buying shares in companies that act responsibly on environmental, social and governance issues. That sounds like a good idea, but how do I find such stocks?
Today I’m going to talk about two I’d buy that I think offer ESG benefits. But first, I think we need to look at how ESG performance is measured in the financial markets.
How to find ESG stocks
The easiest way for me to build a portfolio of ESG stocks quickly would be to use one of the major ESG ranking systems. But which one? It turns out that they all use different rules.
For example, the official FTSE 100 ESG ranking includes oil giant BP, miner Rio Tinto, drinks group Diageo, and British American Tobacco in its top 10.
On the other hand, rival index firm MCSI excludes tobacco, alcohol, gambling, and weapons from its ESG rankings.
Only three of the companies in MCSI’s top 10 are the same as the FTSE 100’s ESG top 10. They’re consumer goods groups Unilever and Reckitt, plus healthcare giant GlaxoSmithKline.
As it happens, I like these companies and already own shares in Unilever and Glaxo. So that’s not a bad starting point. But I need more than this.
ESG investing: 2 companies I’d buy today
I’m not really comfortable buying stocks just because they score well in a standardised test.
What I want is to invest in companies I think will make a positive contribution in the sectors where they operate. Below, I’ve listed two companies I think satisfy this test. They’re both companies I own or would like to buy.
Renewable energy: Let’s start with the E in ESG investing — environment. Although I think oil and gas still have a place, I feel renewables are the future.
My pick from the UK energy sector would be utility group SSE (LSE: SSE). This company has been the UK’s largest renewable energy generator for a number of years. It’s now playing a leading role in building the world’s biggest offshore wind project, the Dogger Bank Wind Farm.
This isn’t without risk — a lot of debt will be required, and it will be some years before SSE can generate a positive return from this investment. But the numbers look fine to me and SSE has a lot of experience in wind. I think the stock’s 5.6% dividend yield will probably be safe, so I’d be happy to buy.
Recycled packaging: Online retail hit new highs last year. But there’s no escaping the ugly impact of this — anything we buy online generally needs extra packaging to be sent safely to our home.
Packaging group DS Smith (LSE: SMDS) is an important player in this market. It also produces packaging for retailers and industrial customers.
DS Smith only produces cardboard packaging and is focused on “closing the loop”. That means using recycled materials wherever possible and making sure that its packaging is recycled again after use.
This business has been through some changes in recent years and its debt levels remain higher than I’d like to see. Any further problems could knock the shares.
However, things are now settling down and I expect to see profits rise steadily over the next few years. This is a stock I own and plan to hold for the foreseeable future.
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Roland Head owns shares of DS Smith, GlaxoSmithKline, and Unilever. The Motley Fool UK has recommended Diageo, DS Smith, GlaxoSmithKline, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.