Investors’ Top ESG Stocks and Investment Firms are Full of Surprises

While there is little doubt that investors have embraced ESG (Environmental, Social and Governance) investing, their awareness of companies and asset managers that provide exposure to it show investors could use more research and better ESG screening tools. 

According to a recent survey by Investopedia and Treehugger, many investors admit that when it comes to researching companies and their ESG impact, they’re winging it. The most common signal for investors that an investment aligns with their ESG criteria is that the company is generally perceived as “better” than industry peers at ESG initiatives. Most do not use ESG stock screeners or ESG scorecards from financial services or equity research providers.

The main way surveyed ESG investors apply ESG criteria to their investment decisions is by investing in individual companies, and excluding industries from their portfolio. 45% say they’ve invested in a company or fund, while 29% say they’ve divested or sold for ESG-related reasons.

The ESG Winner Is… Tesla

From a list of top U.S. companies known for ESG initiatives or alignment, Tesla emerged as the leader of the pack, with nearly a third of survey respondents identifying Tesla as closely aligned with ESG values. Just over a third responded that none of the companies seem closely aligned with ESG standards. 

While electric-vehicle maker Tesla may be associated with some environmental aspects of ESG, its overall rating on ESG screeners like Sustainalytics and MSCI is average. In fact, Sustainalytics, an ESG and impact investing data and research firm, rates Tesla a “High Risk” to exposure on multiple ESG criteria. MSCI ranks Tesla as an industry leader in “Clean Tech” and “Corporate Behavior,” but also indicates Tesla falls behind industry peers for its “Labor Management.” 

Meanwhile, Apple, the second most popular choice in ESG-related companies with 30% of survey respondents, has a slightly better ESG rating by both Sustainalytics and MSCI. Sustainalytics suggests the iPhone maker is at low risk for ESG-related exposure and its leadership team effectively manages ESG risk. MSCI, on the other hand, gives Apple an average rating on ESG concerns, and says it lags behind on matters relating to corporate behavior, supply chain standards and electronic waste.

"Winging it"

Investopedia and Treehugger research shows that as demand for ESG investments grows, investors want better ways to screen for ESG issues. Less than half or 37% of ESG investors claim that ESG funds and stock screeners help them evaluate whether an investment meets their ESG standards. A recurring theme in the survey’s open-ended questions were responses noting readers’ dissatisfaction with available tools for capturing accurate ESG metrics, or knowing how aligned an investment is with their values.

How ESG Investors Find Information And Incorporate ESG Criteria

When it comes to sources of ESG-related information, most ESG investors surveyed reported turning to finance and business websites. Watchdog groups were less popular, with only around a third or 32% of investors saying they look to them for information on ESG investments.

Vanguard Leads in ETF Recognition

In terms of ETF awareness among Investopedia and Treehugger readers, Vanguard led with over half or 55% of respondents aware of the brand as an ETF provider, and 28% aware of its ESG offerings. Fidelity came in second, and iShares ranked third for both overall ETF awareness at 38% and ESG awareness at 18%. Survey respondents may already be clients of the firms they associate with ESG investing, but Vanguard’s brand association with the investing theme is still very strong. For most other investment firms on the survey, awareness of ESG offerings dropped to roughly a third of those who were aware of the brand. 

While Vanguard is an industry leader in providing ESG investment funds, its top ESG fund, the Vanguard FTSE Social Index fund, captures a fraction of the investment giant’s $7.2 trillion in assets under management (AUM) with its $10.87 billion in AUM. In fact, according to MSCI’s ranking of top ESG investment funds, Vanguard’s comes in third behind the Parnassus Core Equity Fund, with $22.94 billion in AUM tied to ESG, and the iShares ESG Aware Fund, with $13 billion. Fidelity Investments, the brand that ranked second among readers in terms of ESG awareness, does not have a single fund on MSCI’s list of top ESG funds in 2021.

Investors are increasingly eager to align their investments with ESG-related companies and fund providers, but many rely on personal judgement about what constitutes an ESG investment, and don’t use available research and metrics from ESG-ratings providers. That's a huge opportunity for the financial services industry, as ESG investments are only likely to grow, with 67% of respondents planning to invest more in companies with strong ESG initiatives over the next five years.

Data by Amanda Morelli/Adrian Nesta.