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3 ESG Stocks That Continue to Perform

October 15, 2020

I know that many of you are getting onboard with ESG investing. And I also know that some of you might think that it’s bunk. But for me, it’s not about a political view. It’s about what is working in the stock and bond markets.

ESG stands for environmental, social and governance. It’s both a category of companies as well as a scoring mechanism of companies. But fundamentally, ESG is a means of investing that will not only provide growth and income but with a better impact on the environment, a greater positive contribution to society and managed in a more transparent way that is focused on shareholders as well as other stakeholders.

ESG Rises in Demand & Performance

Individual investors are still a smaller part of the stock and bond market in their direct investments. Institutional investors continue to dominate. And while many institutions are run privately for the benefit of their founders, others are run for the benefit of many different cohorts. Think pension funds or endowments, which make up a large portion of the capital market in the US and beyond.

The beneficiaries of these funds are demanding that fund management invest more in ESG-compliant or ESG-focused companies. And historically, beneficiaries have had a large sway on fund management when it comes to targeted issues or agendas.

BlackRock (BLK), inside Profitable Investing, has been making larger ESG-focused investments. Larry Fink, the founder and CEO of the company, is a big proponent of ESG and has led the asset management company to roll out a series of funds, including a major initiative in its dominating ETF product line up.

The S&P ESG Index has returned 202.10% over the trailing 10 years for an average annual equivalent return of 11.7%.

S&P ESG Index Total Return—Source: Bloomberg Finance, L.P.

And over the trailing year, the ESG index has outperformed the S&P 500 by 18.8%. This shows that ESG can be more defensive or reliable and may well attract more capital for better returns than the general stock market going forward.

S&P ESG & S&P 500 Indexes Total Return—Source: Bloomberg Finance, L.P.

Now, ESG compliance is a squiggly bit of analysis. On my Bloomberg terminal, there’s a function that takes a lot of compiled data and comes up with all sorts of embedded ESG criteria utilizing artificial intelligence and other calculations.

So, compliance can be achieved across industries at some level for environmental, social or governance. But I want to direct your attention to three companies firmly leading in the ESG green energy space that are all great opportunities right now.

Environmental Growth & Income

Renewable energy is a significant part of the business for ESG-friendly utilities. Government incentives led many utilities to enter and expand in renewable energy. And state and local governments have been mandating increasing use of renewable energy as a percentage of power generation.

This has led the poster child of the ESG utility market, NextEra Energy (NEE) also in Profitable Investing, to really perform. NextEra is one of the largest wind and solar power companies in the world. It operates in its regulated market in Florida (utility FPL) and has expanded around the nation and beyond in its unregulated business.

The stock has generated a 610.1% return since it was added to the Total Return Portfolio. For the trailing year, it has returned 23.5%, which is well above the S&P 500’s return.

NextEra Energy Stock Price—Source: Bloomberg Finance, L.P.

Yielding 2.1%, NEE is an ESG buy in a tax-free account.

Following the playbook of NextEra is Xcel Energy (XEL). It is deploying renewable energy generation in its regulated markets and ever more for its national unregulated business that serves nearly four million customers.

Xcel Energy Stock Price—Source: Bloomberg Finance, L.P.

Over the past five years, it has generated a return for shareholders of 125.1%, which is 51.6% better than the return of the S&P 500. Yielding 2.6% with its recently affirmed dividend, XEL is another ESG buy in a tax-free account.

But perhaps one of the best ESG opportunities right now is Hannon Armstrong Sustainable Infrastructure Capital (HASI). Hannon Armstrong provides financing for renewable energy and related projects.

It’s set up as a REIT, and the structure helps it avoid corporate income tax, which means more cash for dividends. And thanks to the Tax Cuts & Jobs Act of 2017 (TCJA), the dividends come with a 20% deduction at tax time.

Hannon Armstrong Sustainable Infrastructure Capital Stock Price—Source: Bloomberg Finance, L.P.

But what makes the company even better isn’t just the renewable energy projects or the tax reductions or the dividend income. It’s that its financed projects come with government guarantees. This provides a backstop for the company and shareholders, which in the current economy is very attractive.

Since it was added to the portfolio at year-end 2019, it has returned 23%. And since the general stock market low in March to date, the shares have returned 115.3%. With more ESG-seeking investors, I see this company gaining more notice.

It’s still a bargain at a mere 2.4 times its intrinsic book value, which is cheap for a REIT and more so for a government-guarantee wielding financial. Yielding 3.5%, HASI is another great ESG buy in a taxable account.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life