Want to find out the factors that drive success for an environmental, social, and governance focused stock?
ESG is a framework to assess a company's value beyond purely its financial returns. It has grown significantly in importance over the last five years and is now a core factor considered by most institutional investors when deciding how to allocate the capital they manage and how to structure their portfolios.
Listed companies that put an emphasis on environmental, social and governance issues when making business decisions will more than likely score higher on ESG metrics which will increase the chance they will be considered as ESG stocks. The reason this is important is that a strong ESG score will make a share eligible for inclusion in more funds and hence increase the amount of funds available to invest in it. This has positive repercussions for share price and the equity risk premium that the market will demand from that company.
A key reason for a company and its investors wanting to focus on ESG is due to the increasing assumption that the overall financial performance of a company is becoming more impacted by environmental and social factors. It is an attempt to capture externalities that are real costs but are not historically priced into the market.
Investing in ESG stocks is a form of socially responsible investing that prioritizes financial returns alongside a company’s impact on the environment, its stakeholders, and the planet. These types of investments not only aim to create positive returns but additionally a positive influence on the environment and society.
The financial performance of ESG stocks has also drawn investor attention. During the market turbulence caused by the pandemic, many companies with strong ESG track records showed less volatility than their non-ESG rivals.
What categories fall under ESG?
ESG factors are the standards a company needs to meet in order to be considered a sustainable business. However, it is worth noting there is currently no globally recognised list of standards. Therefore, investors, companies and ratings agencies all have different views of what is, or should be measured, and the relative weightings of each ESG metric.
Below are some example ESG factors we have highlighted that are guidelines as to what could fall under environmental, social and governance.
Environmental
- Pollution and carbon emissions
- Deforestation
- Green energy usage
- Waste management
Social
- Human rights
- Working conditions
- Health and safety
- Employee diversity
- Community engagement
Governance
- Business ethics
- Board pay and bonuses
- Political lobbying and donations
- Board diversity and structure
- Tax strategy and payments
The increased demand for ESG stocks
ESG investing has become a growing trend since the desire for a more equal, eco-friendly and equitable society has gained greater attention. Businesses are being driven to accept and implement the core values of ESG to keep pace with rival firms who are already improving efforts on it, especially if they want to appeal to younger generations and the more ethically-minded investors.
ESG standards also allow retail and institutional investors to avoid companies that could have an amplified financial risk based on their environmental or social policies and stances.
We have witnessed a noticeable increase in ESG stock investing globally. The pandemic has encouraged and further driven this trend, mostly due to market disturbances which has led both institutional and retail investors to turn to ESG stocks for improved resilience. Investors and companies are progressively realising the links between social, environmental, and economic issues, and ultimately how these categories can impact the overall financial performance.
ESG stocks to watch
Which ESG companies are experiencing strong performance? Here is a selection of ESG stocks, ie companies that have a strong ESG score, that are publically traded. Many of these companies are held in dedicated ESG-focussed funds managed by some of the major UK-based asset managers.
You can read more detailed broker research notes about them all here on Research Tree.
GlaxoSmithKline plc (Market cap: £80.6bn)
GlaxoSmithKline (GSK) is a manufacturing giant known for mainstream prescription medications, vaccines, and consumer health products. The company has a primary listing on the London Stock Exchange and is a constituent of the FTSE 100 Index, where it currently ranks fifth largest in terms of market cap.
The company has 13 core commitments which help build their ESG framework and drive progress in the key areas where they believe they can run their business in a responsible way. A more detailed breakdown of this which outlines ESG progress can be found here. Indeed, since 2010 GlaxoSmithKline has several times ranked first among pharmaceutical companies on the Global Access to Medicines Index. In terms of share price, the stock has performed well across 2021 and is currently up 18% when compared to this time last year (21/12/20 – 21/12/21).
Want to find out more about GSK? Then click HERE to view its dedicated page on Research Tree, where you can find a mixture of relevant broker research, RNS announcements, videos and podcasts.
Softcat Plc (Market cap: £3.5bn)
Softcat is a UK based IT infrastructure provider listed on the London Stock Exchange, and is also a member of the FTSE 250 Index. The company has built a strong foundation around ESG policies which impact and drive their daily business decisions, which has further been strengthened by committing as a signatory to the United Nations Member States ‘17 Sustainable Development Goals’. The company has also projected itself to be ten years ahead of government targets towards the goal of reaching carbon net zero, and equally aims to have a fully carbon net zero supply chain by 2040.
Softcat was also the first company within the FTSE 250 to be awarded ‘five-star status’ for reaching multiple sustainable development goals. These included gender equality, sustainable economic growth, reduced inequalities, responsible consumption, climate action, and global partnerships. This is further explained in their company sustainability presentation on their website which can be found here.
Since floating in 2015, the share price has experienced a fairly consistent upwards trajectory, with the stock up 500% across the last five years alone (21/12/16 – 21/12/21).
If you want to find broker research about Softcat, then click HERE to view its dedicated page on Research Tree. You will be able to see broker research, RNS announcements, videos and podcasts all in one centralised place.
Learning Technologies Group Plc (Market cap: £1.3bn)
Learning Technologies Group offers large and mid-sized organisations a new approach to their learning and talent challenges in a world driven by digital transformation. The company is building on the success of its existing ventures and plans to continue its growth through strategic acquisition and diversification, with the objective of providing a truly exceptional portfolio of services and products for our existing and new clients across the globe.
With an increasing focus on ESG, LTG seeks to work to the Ten Principles of the United Nations Global Contract, guiding principles for corporate sustainability that encompass human rights, labour, environment and anti-corruption. This is explained in more detail on their website here.
The group has seen its share price rise 380% when compared to this time five years ago (21/12/16 – 21/12/21), demonstrating the growing support in the company and its chosen strategy.
If you’re interested in discovering professionally produced broker research on Learning Technologies Group then click HERE to view its dedicated page on Research Tree.
