What are we looking for?
U.S. companies with a positive ESG screen.
The screen
Two weeks ago, I wrote about a strategy that searched for Canadian companies that screened well from an ESG perspective. Today, I’m going to repeat this process within the U.S. universe.
Recall that ESG stands for environmental, social and corporate governance. Investors focused on this area typically do so for two main reasons:
- To satisfy their ethical beliefs, and/or
- To reduce risk in their investment portfolio.
While the first point seems intuitive, many investors forget or aren’t aware of the second. Companies that are considered ESG-friendly or socially responsible typically won’t be subject to media backlash or scandal, which in turn helps preserve both their integrity and their bottom line.
Today’s U.S. ESG strategy selects stocks based on several of Sustainalytics ESG factors. The overall ESG score measures how a company proactively manages the ESG issues that most affect their business, higher values preferred. In order to qualify, stocks must have an overall ESG score in the top one-third of peers (today, this value is greater than or equal to 56).
The controversy score is an assessment of how a company’s controversies affect stakeholders and its reputational risk within 48 hours of alleged or actual misconduct being reported (low values preferred). Stocks must have a controversy score less than or equal to three, or an ESG peer group score (measures a company’s ESG score relative to their industry peers, high values preferred) above three.
More about Morningstar and Sustainalytics
Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. Sustainalytics, a global provider of ESG research and ratings, is a strategic partner to Morningstar. Its company-level ESG ratings underpin Morningstar’s Sustainability Rating for funds.
What we found
I used Morningstar CPMS to backtest this strategy from October, 2012, to March, 2018. During this process, a maximum of 20 stocks were purchased. Stocks were sold if their ESG score fell below the top third of peers, if their highest controversy score was greater than four, or their peer group score was less than three. When sold, the positions were replaced with the highest-ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 20.1 per cent while the S&P 500 Total Return Index returned 14.6 per cent across the same period.
Stocks that qualify for purchase into the strategy today are listed in the table below. As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
Emily Halverson-Duncan, CFA, is a director, CPMS sales at Morningstar Research Inc.
Emily Halverson-Duncan, CFA