Sustainable investing and environmental, social and governance (ESG) investment strategies are a hot topic at the moment on Wall Street. The ESG ETF assets are already more than double in 2019 and another sign of the increasing popularity of ESG, is the launch of E-mini S&P 500 ESG Index futures, by the CME Group on Nov. 18.
This article will provide more details about ESG investing, ESG investing and potential impact on performance and risk. Furthermore, dividend aristocrats and their ESG-score will be discussed including a top-10 and stocks to avoid.
What is ESG investing?
ESG generally refers to investing in companies that are meeting positive standards of corporate responsibility.
- Environmental – having a positive impact on the environment, pollution and the climate change on a global scale
- Social – positive relations with employees, working conditions & diversity including child labor and slavery. Involvement of local communities
- Governance – Corporate governance, leadership practices, executive compensation plans, and shareholder rights
Does investing in ESG stocks or ETF’s produce better returns?
There’s a growing stack of evidence indicating that stocks of companies that meet the standards for ESG-factors are likely to outperform the market. Here is an overview of the most respected investing sources sharing insights on ESG and stock performance.
MSCI
High ESG-rated companies were more competitive and generated abnormal returns, often leading to higher profitability and dividend payments, especially when compared to low ESG-rated companies. 
Source: MSCI
High ESG-rated companies have shown lower systematic risk exposure, evidenced by less volatile earnings and less systematic volatility. Compared to low ESG-rated companies, they also experienced lower betas and lower costs of capital.
Morningstar
Sustainable investing does not compromise. In fact, sustainable investing demonstrates lower risk, with a 20% smaller downside deviation over time than traditional funds.
ESG could boost your returns by a significant amount: a strategy of buying stocks that rank well on ESG metrics would have outperformed the market by up to 3 percentage points per year over the last 5 years.
Traditional financial metrics, such as earnings quality, leverage and profitability don’t come close to ESG as a signal of future earnings volatility or bottom-line risk.
15 out of 17 (90%) bankruptcies in the S&P 500 between 2005 and 2015 were of companies with poor Environmental and Social scores five years prior to the bankruptcies.
ESG investing is not just about doing good. A growing body of research points to a link with asset performance. Companies that manage sustainability risks and opportunities well tend to have stronger cash flows, lower borrowing costs and higher valuations.
There is growing consensus that integrating material ESG factors correlates to long-term financial returns and can help generate alpha.
Overview of ESG ETFs
End of Q3 2019, there were 220 trackers globally which are related to a sustainability theme such as ESG, SRI, impact, green, wind, solar. When focusing on environmental, social and governance (ESG), the are 87 ESG products tracking roughly $16 billion in the U.S. This is well below the $124 billion ESG ETF assets in Europe
Top ESG ETFs by total AUM
The ESG-ETF’s is easy access to ESG relevant companies, the tradability and often the low cost-structure is a benefit. Something to watch is the concentration of stocks present at some ESG-ETFs since some have an exposure to popular stocks which is over 5%.
Some stocks are very popular and often used by sustainability ETF’s, below a list of the top-10 most popular stocks:
Sometimes it is unclear why stocks, such as Johnson & Johnson, are included given their average ESG-score and high Controversy level (5 out of 5).
ESG-rating dividend aristocrats
Since 1999, RobecoSAM (SAM) has been conducting an annual Corporate Sustainability Assessment (CSA) and maintaining a global database on corporate sustainability. (see https://yearbook.robecosam.com) Only a few dividend aristocrats made it to the top of the 2019 list (Gold, Silver & Bronze).
The table below lists the dividend aristocrats and their ESG-classification:
The S&P 500 ESG Index is also a source to find and assess “ESG”-positive Dividend Aristocrats. Here is a short definition of this index: “The S&P 500 ESG Index is a broad-based, market-cap-weighted index that is designed to measure the performance of securities meeting sustainability criteria while maintaining similar overall industry group weights as the S&P 500.”
The following dividend aristocrats are not a member of the S&P 500 ESG Index, meaning that they are excluded based on the abovementioned steps and will have a low ESG-score.
Top-10 ESG Dividend Aristocrats
The tables below list the top-10 US and European dividend aristocrats with the highest total ESG-score. Dividend aristocrats with a high Controversy level, meaning 4 or 5 are excluded from this top-10.
US Dividend Aristocrats top-10 ESG Score
European Dividend Aristocrats top-10 ESG Score
Final thoughts
Combining ESG-data with other important business performance and dividend growth data can help you to build a portfolio that not only provides (at least) similar returns with lower risk but also with a positive ESG impact.
On every dividend aristocrat page on our website, data on the 3 ESG elements, a total ESG-score, and the controversy level are available.
Premium members also have access to our ESG-screeners for US and European dividend Aristocrats.
Other Sources of Dividend Investment Ideas
The Dividend Aristocrats list is not the only way to quickly screen for businesses that regularly pay rising dividends.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of less than 20 businesses with 50+ years of consecutive dividend increases.
- The MoneyInvestExpert Defensive Aristocrats is a performance-based top-10 selection of the Dividend Aristocrats to outperform the market on the long-term.
- Portfolio lists like the Berkshire Hathaway Portfolio or Bill Gates’stock portfolio can be a source.
- For the European focused investors there is also the list of European Dividend Aristocrats.
- Dividend Champions are not necessarily members of the S&P 500 index, have increased their dividend for 25 or more consecutive years.
- 100+ years of dividend, the list of stocks that pay over 100 year of dividend can be an list of inspiration.
Next to selecting the right dividend stocks, important principles for successful long-term investing are Disciple, Diversification, Defensive & indeed Dividend. Read more about this in our free e-book.
Also, our monthly newsletter and premium member data will help you to invest smarter.
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