Investors who think long term will naturally take into account environmental, social and governance (ESG) factors when buying the stocks of certain companies.
That’s because ESG investing is becoming big business but also because shareholders are much more conscious of the impact on society, and the globe, that their companies are having.
Perhaps that’s food for thought today (22 April) which also happens to be Earth Day 2022.
As investors everywhere are concerned about which companies their capital is helping to fund, it’s worth taking a look at ESG-forward stocks.
With that, here are three ESG stocks that investors can buy and hold for the long term.
The office software and cloud computing giant Microsoft Corporation (NASDAQ: MSFT) might not be the first ESG company that jumps to mind but it has been very active in mitigating its environmental impact.
And given its heft in the cloud computing space via its Azure service, the company is indirectly responsible for a large chunk of carbon emissions from power-hungry data centres.
Microsoft is taking action, though. The company has committed to turning “carbon negative” by 2030 and removing all of its historical carbon emissions (since its founding in 1975) by 2050.
It was one of the first big technology companies to announce such an ambitious goal. To reach its goals, the company is going big on renewable energy.
In its fiscal year 2021 (FY21), Microsoft signed new purchase power agreements (PPAs) for approximately 5.8 gigawatts (GW) of renewable energy across 10 countries globally.
Meanwhile, it’s also making its devices more energy-efficient. For example, its latest Xbox has an energy-saving mode that can reduce the machine’s power usage when in standby mode by over 80%.
With a clear and ambitious sustainability framework that tracks both its goals and progress, Microsoft is one of the leading ESG stocks to own today.
2. Home Depot
Second on the list is home improvement retailer Home Depot Inc (NYSE: HD), the largest home improvement chain in the US.
The company is involved in a vast array of supply chains and logistics, as well as employing over 500,000 people, many of them “associates” who work in store helping customers on a daily basis.
Again, the company has been very active on the environmental front and has pledged to have 100% renewable electricity power all its Home Depot facilities by 2030.
In 2021, 71 of its stores operated solar farms on their rooftops (helping to generate renewable power), up from 47 in 2019.
On the social front, the company is also pulling its weight. In 2020, out of Home Depot’s new hires, 35% were women and nearly 53% were ethnically/racially diverse.
That has helped underrepresented minority groups’ share of Home Depot’s US employee base continue to rise. That ratio compares favourably to the overall US working population (see below).
While it could perhaps improve the number of women hires it has, the company is at least transparent about the progress it is making on certain fronts.
Source: Home Depot ESG Report 2021
Finally, we have Trex Company Inc (NYSE: TREX), a company that probably not many people have heard of.
It’s a major manufacturer of wood-alternative composite decking, railing and other outdoor items that are made from recycled materials.
Trex is a market leader for outdoor living materials and has one of the strongest distribution channels in the industry with its goods being sold in both Home Depot stores as well as Lowe’s Companies Inc (NYSE: LOW) outlets.
The basic premise of Trex decking is that it is better for the environment, more durable, and longer-lasting than wood. In fact, all of its decking is made from 95% recycled and reclaimed materials.
As of 2021, wood still made up 75% market share of the US outdoor decking market, according to Trex’s own estimates. That presents the company with a long runway both for its business and to do good for the environment.
Even in the production of its decking, Trex is improving the process. In two of its large manufacturing facilities, 99% of the water is recycled annually with closed-loop cooling systems.
Earning better returns by doing good
It’s no coincidence that investors are now realising that they can “do good” and still make an attractive investment return.
For investors who have bought and held Microsoft, Home Depot and Trex, they have been rewarded with outsized returns over the past five and 10 years.
By continuing to focus on ESG issues, the companies are setting themselves (and their shareholders) up for ongoing success in future.
Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips owns shares of Microsoft Corporation, Home Depot Inc and Lowe’s Companies Inc.
Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.
He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.
In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.