ESG Investing: How to Pick "Good" Stocks to Buy - YouTube

Corinne Cardina: What if instead of causing stress and confusing you, investing made you

feel warm and fuzzy inside?

What if you could buy a stock and know you were investing in a business that was making

the world a better place? This is where ESG investing comes in.

My name is Corinne Cardina. I'm an editor here at The Motley Fool.

I'm here to talk about ESG investing.

The ESG approach looks at the impact a business has on its community, stakeholders, and the

environment to focus on companies that do good in addition to performing well.

Before we learn how to find high-ESG stocks, let’s dive into the three components that

make up this investing strategy. E is for environmental.

The environmental component evaluates a company's impact on our home planet.

For example, is the company actively reducing its carbon footprint?

Does it design its products to be reused and safely dispose of hazardous byproducts?

A leader in the E factor might produce renewable energy or make electric cars. S is for social.

The social component consists of people-related elements like culture and issues that impact employees,

customers, suppliers, distributors, communities, and society.

A leader in the S factor prioritizes diversity and inclusion, ensures ethical sourcing throughout

its supply chain, and participates in social justice issues that matter to its stakeholders,

including marriage equality and minimum wage law. G is for corporate governance.

The corporate governance component relates to the board of directors, company oversight,

management’s attitude toward shareholders, and how corporate incentives align with the business's success.

A leader in the G factor has a diverse and independent board, executive compensation

and benefits based on long-term business performance metrics, as well as a good relationship with regulators.

What’s the difference between ESG and Socially Responsible Investing?

You may know about SRI,

in which investors exclude unpalatable industries like weapons, gambling, and alcohol.

ESG instead takes an opt-in approach, so investors buy stocks of businesses with impressive ESG

attributes rather than avoiding those that don’t.

I’m sure you’re thinking: "Sounds great, but it also sounds like ESG filters out a lot of companies.

Is ESG investing a way to beat the market?"

Heaps of evidence shows companies prioritizing ESG issues generate superior long-term financial

performance across many metrics, including return on invested capital, ROIC, and alpha

for market outperformance.

Harvard Business School studied 2,300 companies and found those investing in sustainability

have better sales growth, margins, and stock performance, and that these sustainability

activities actually drive business value.

ROIC is one of the primary drivers of enterprise value and stock price performance.

It measures how efficient management is at allocating money.

ROIC can be applied across industries, making it a powerful tool for investors looking for

shining examples of high-ESG companies across sectors to create a well-rounded portfolio.

JUST Capital found its highest quintile of ESG companies have 4.5% higher ROIC than the

bottom-quintile companies. Even Wall Street is coming around.

Morgan Stanley said, "An ESG focus has become essential for long-term compounding."

Anyone can integrate ESG analysis into their existing investment strategy.

Forget marketing and charitable donations -- ESG goes deeper by measuring how a company’s

purpose drives its profit, and how that purpose relates to ESG factors.

It’s easy to talk the talk, but which corporations are walking the walk, and how can you tell the difference?

Look for things like: • Sustainability reports.

High-ESG companies publish these annually to update investors on their progress on meeting

ESG targets, how much money they’re reinvesting into ESG issues, and ROIC.

• Inclusion on the Dow Jones Sustainability Indices and other ESG lists.

• You can also find ESG info in the research sections of your online brokerage or in company filings.

Once you’re satisfied with a stock’s ESG elements, you aren't ready to buy yet.

The second step is to evaluate the financials by answering these questions: 1.

Does the company have a healthy balance sheet? 2.

Can the business generate growing free cash flow and organic revenue growth?

What does a strong ESG stock look like?

Let’s put it all together by looking at a Fool favorite: salesforce.com.

Added to the Dow Jones Sustainability Index in 2018, salesforce.com is an example of an

exemplary ESG leader in tech.

The company’s ESG efforts are detailed in its Stakeholder Impact Report.

• Environment: Salesforce com has committed to reaching 100% renewable energy by 2022.

The company provides a carbon neutral cloud to its customers.

• Social: Ohana, the Hawaiian word for family, is salesforce.com's motto.

Its Government Affairs Team supports public policy that positively impacts stakeholders,

with an emphasis on trust, innovation, customer success, and equality.

• Governance: Founder and co-CEO Marc Benioff owns about 5% of the company and is vocal

about the importance of cybersecurity, a highly material topic for the cloud-based provider

of customer relationship management.

If you aren't interested in buying individual stocks, there are also ESG-focused exchange

traded funds, or ETFs, including a Racial Justice Index Fund.

The easiest way to find high-ESG companies is to look for those with a single-minded

mission to improve the world.

Beyond Meat's Executive Chairman Seth Goldman said, "Investment returns are never guaranteed,

but by investing in line with my values, I know I won't regret my choices."

Increasingly, investors are starting to feel the same way. Thanks for watching this video.

If you have an idea for an ESG stock, drop it into the comments section below.

And, if you're an investor who's just starting out, we have a guide with everything you need

to know and five great starter stocks. To get it, go to fool.com/start.

If you liked the video, be sure to give us a thumbs up and subscribe to get more content

like this from The Motley Fool.