ESG sustainability data is becoming an important tool for investors and companies (2024)

When people think of ESG, the word “environment” usually comes to mind. And that is understandable. ESG stands for environmental, social and governance. It is a group of non-financial factors that have become increasingly important to investors, regulators and the public. But environmental factors are only part of the story, especially when it comes to finding the best ESG companies.

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Extreme weather events have increased in the past yearenvironmental considerations. Social challenges – diversity, human rights and workplace issues – have become more important as workers return to the office. Consider this year's industrial action, from the SAG-AFTRA strike to the layoffs at the United Auto Workers. The UAW is not against the transition to electric vehicles, but is concerned about the impact of the transition on employees.

And all year long, companies wait for the SEC to issue new rules for climate disclosure. Implementation timelines are opaque and lawsuits are virtually assured. However, the new rules will impose significant reporting obligations on companies and add a sense of urgency to their ESG strategy planning.

Helping investors find the best ESG companies

The many factors that play a role in ESG rankings can produce surprising and confusing lists. A company may excel on one ESG dimension, such as governance and management, but perform poorly on environmental performance.

The energy transition is here. Dow Jones, the parent company of IBD, says US asset managers will significantly increase the percentage of ESG-related investments in their portfolios in the coming years. By 2025, 11% to 15% of US managers will allocate 40% of their portfolios to ESG investments.

How can investors protect their portfolios and accurately value the companies poised to benefit from ESG excellence?

Finding the best ESG companies requires research. Investor's Business Daily can help. We have released our fifth annual special ESG Investing report. Public companies that made our list of 2023100 Best ESG Companies combine high sustainability scores from Dow Jones with superior technical and fundamental stock ratings from IBD. They stand out when it comes to ESG investing.

Read ourFull special reportAt IBDs 2023 100Best ESG Companies, Our gaming history opGreen patent innovationAnd seeComplete list of winners.

Best ESG companies: meet the top 3

This year tops the listMicrosoft(MSFT).Used materials(ENORMOUS) took second place. In third placeWoodward(WWD). All 100 companies on our 2023 list topped the Dow Jones ESG scores and had aIBD composite assessmentof 81 or better (on a scale of 1 to 99) as of August 25. These companies have also made or beaten the S&P 500 over the past five years. To view current stock ratings and charts, visitIBD's inventory management page.

Verisk Analytics(VRSK) InMasterCard(MA) finished fourth and fifth, respectively, on this year's IBD Best ESG Companies list.

Read our profiles and interviews about the best-scoring companies:

• Microsoft: This 'Magnificent Seven' stock is also the best ESG company
• At Applied Materials, reducing CO2 emissions is a team effort
• Woodward's focus on energy is paying off with a high ESG score and strong stock performance

Technology stocks dominated in 2023

Technology companies, especially software vendors and semiconductor manufacturers, earned 11 of the top 25 spots on our list of the Top 100 ESG Companies this year.

One of the reasons for the revival of technology stocks after a slow 2022. Technology Select Sector SPDR ETF (XLK) has more than doubled the S&P 500's return so far this year.

Technology companies are also focusing on more than just measuring and managing their own ESG factors. Many also provide products and services to help companies in other sectors do this.

Microsoft, our #1 company, says it helps its customers build sustainable solutions and reliably measure and report progress. It also advocates for global policies that it believes will benefit the environment and combat climate change. Microsoft was also high on our list3 best companies in 8 sectors, as well as on our list ofTop scoring companies on 5 sustainability dimensions.

ESG reporting is emerging as an important tool for companies and investors to demonstrate their commitment to sustainable practices and combating climate change, saysRicardo Aceves, former deputy research director for ESG Investing and Sustainability at Dow Jones.

DJ's proprietary data reveals "a global trend where companies are increasingly focused 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. These include greater public awareness of the consequences of extreme weather events and increasing investor recognition of the financial risks associated with climate change. Regulatory pressures requiring disclosure of ESG performance, and the desire to build a competitive advantage, also play a role.

Investors still focus on finance, personal finance

Extreme weather events, war, oil prices, SEC regulation and ESG results can be big for companies. But concerns about the economy and private finances overshadow investor concerns about the climate.

An IBD survey in September found that the percentage of investors who consider it important to invest in companies that align with their values ​​was much lower than last year, from 77% to 66%. More than half indicate that they are not familiar with ESG investing.

“The assumption is that using ESG as an investment shield is just philanthropy, but not actually altruism,” writes author and sustainability expert Andrew Winston for the MIT Sloan Management Review. “The investors who understand it understand that ESG provides a critical look at a company's risks and helps measure how resilient or ready for a low-carbon future a company might be.”

The impact of the SEC's climate rules

The newSEC climate disclosure rulesis likely to pose a major challenge for public companies.

“With these regulations, companies will need to increase their ability to collect, manage and measure ESG data,” said Aceves of Dow Jones. “They must act quickly to produce investor-quality reports that include non-financial information on climate risks and carbon emissions.”

The timeline for implementing the rules is “only a best estimate, as the regulator will need to address certain aspects of the proposal that may be difficult to implement,” Aceves said. These include the 1% materiality threshold for financial disclosure, known as a 'bright line test', and the disclosure ofScope 3 emissions.

OfGreenhouse gas protocol– which provides accounting standards for greenhouse gas emissions – classifies greenhouse gas emissions into three areas.

Scope 1 includes direct emissions from own or controlled sources.

Scope 2 includes 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 greenhouse gas emissions.

Scope 3 includes all other indirect emissions that occur from a company's upstream and downstream activities. These emissions can include, for example, business travel and waste processing.

There will certainly be lawsuits if the rules are challenged. Aceves also said, “Given the presidential election next year and the campaign against ESG by some Republican politicians, the SEC will face greater political volatility at best.”

However, California beat the SEC to it. Gov. Gavin Newsom recently signed the state's new Climate Corporate Data Accountability Act. This will require American companies with an annual turnover of USD 1 billion or more to report both their direct and indirect greenhouse gas emissions from 2026 and 2027.

ESG investing: the methodology of the best companies

To compile the list of the Top 100 ESG Companies in 2023, we started with each company's Environmental, Social and Governance (ESG) Sustainability Score, compiled by Dow Jones Newswires, an IBD subsidiary. These results include a wide range of information on the ESG profile of more than 6,000 global companies.

On August 24, IBD asked Dow Jones for an ESG-rated list of all the US-traded companies it tracks, a total of 2,067. We then narrowed the list to 1,559 companies on August 25 by removing privately held companies and companies with a share price of less than $10 per share. stock. Companies that did not have sufficient data to create an IBD Composite Rating were also removed from the list.

We further qualified the ESG investment list by removing companies that have not met or beaten the S&P 500 over the past five years. We selected the 100 with the highest IBD Composite Rating - all with a score of 81 or better. To break all ties, we looked at the relative strength of companies and then, if necessary, their earnings per share. Finally, we ranked the 100 companies based on Dow Jones' ESG score.

The logos and endorsem*nts of top ESG companies are available for licensing through Investors Business Daily's partner, The YGS Group, via email at[email protected]or at 800-290-5460.

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