In the search for investments with long-term growth potential, an increasing number of funds, and fund managers, are focusing on companies that score high on so-called Environmental, Social and Governance (ESG) criteria. Adherents of ESG investing contend that the most sustainable business models are to be found in companies that are good stewards of the environment, while also socially responsible and governed wisely, committed to ethical and honest relationships with customers, investors, employees, suppliers, government and the community at large alike.

"ESG factors aren't non-financial if they are material," Erika Karp, founder and CEO of Cornerstone Capital, told Barron's. Indeed, a 2016 academic paper cited by Barron's found a positive correlation between scoring high on ESG criteria and delivering better financial results and stock market performance. A recent Bank of America Merrill Lynch study found that high ESG companies had lower earnings volatility and higher returns on equity, Barron's adds.

Investment managers participating in a recent Barron's roundtable like the following stocks based on sustainable growth criteria: Clorox Co. (CLX), Gilead Sciences Inc. (GILD), National Oilwell Varco Inc. (NOV), Pentair PLC (PNR), Tencent Holdings Ltd. (TCEHY), Unilever NV (UN) and Xylem Inc. (XYL).

Company Business ESG Highlights
Clorox Consumer products 85% of packaging from recycled goods, 41% of managers outside production lines are women
Gilead Sciences Biotech 50% of middle managers are women, offers key drugs at low cost to developing world
National Oilwell Varco Oil & gas drilling services Safer, less costly drilling
Pentair Water supply Water quality and conservation
Tencent Internet and mobile Biggest holding of ESG-focused Calvert Emerging Markets Equity Fund (CVMAX)
Unilever Consumer products Sustainable brands and supply-chain practices
Xylem Water supply Smart metering to conserve water

Source: Barron's

Defining Sustainable Investing

Karp also told Barron's: "I don't use the term ESG investing. I consider ESG analysis a critical discipline in the field of finance and investing." She added: "We further define corporate sustainability--which is really just corporate excellence--as the relentless pursuit of material progress toward a more regenerative and inclusive world economy."

Roundtable participant Jon Hale, the global head of sustainable investing research at Morningstar Inc., also said that he views ESG as an analytic framework used to judge sustainability. In his opinion, sustainable investing is "long-term-oriented investing, which takes into account the implications of broader systems--social, economic, and environmental--on a company, and the company's impact on those systems and stakeholders."

Want to learn more about investing in companies with sustainable business models? Visit Investopedia's Impact Investing hub.


Tim Clift on beating benchmarks and shifting construction

BlackRock CEO Urges Sustainability

Sustainable investing, or investing driven by ESG analysis, is no longer a fringe movement. For example, Larry Fink, CEO of investment management giant BlackRock, has voiced his strong support of the practice, per another Barron's story. He has a long track record of urging individual investors and investment professionals to drop their obsession with short-term results and look to the long term instead.

Indeed, as Barron's summarizes Fink's view, rather than worrying about the next quarter, investors should be looking ahead by a decade or more. This is where sustainability and ESG factors are highly relevant to him. "To prosper over time, every company must not only deliver financial performance, but also show how it makes positive contribution to society," he wrote in January, as quoted by Barron's.

Vanguard Joins the Movement

The Vanguard Group has announced plans to launch two new ETFs in September that follow ESG investing principles, per a third Barron's story. The $4.4 billion Vanguard FTSE Social Index Fund (VFTSX) already has delivered market-beating performance over the last 5-year and 10-year periods, per Barron's. As an example of how ESG investing has gone mainstream, Barron's adds that $108 billion already is in ESG-driven funds, and that ESG principles may be major factors governing a staggering $23 trillion of investments in total.