More than half of all actively managed sustainable equity funds own shares of Microsoft. It is the most-often owned stock among the 20 most highly owned U.S. large caps in the ESG (environmental, social, and governance) universe. Alphabet (36%) and Thermo Fisher (31%) are the second and third most often owned large cap stocks.
Sara Mahaffy, Robyn Buardmesser and Lori Calvasina of RBC Capital Markets have updated their fourth-quarter review of S&P 500 stocks that are widely owned in actively managed ESG funds but less popular in traditional long-only funds and hedge funds.
To identify its so-called ESG Darlings, RBC began with the 2020 Global Sustainable Investment Alliance report that identified $35.3 trillion in global sustainable investments across all asset classes. Then the analysts reviewed Morningstar’s tracking list of sustainable equity funds and further narrowed the list based on additional criteria. Assets under management in the Darlings total about $1.3 trillion.
In the March quarter, RBC’s analysts added five stocks to the ESG Darlings list. They have also removed four stocks from the list. In a comment on the revisions, the analysts write:
What has jumped out to us in recent updates is that relative performance trends have stabilized over the past month, following meaningful underperformance at the start of the year. Recent outperformance has coincided with relative valuation premiums returning to recent lows and relatively strong inflows into US listed ESG & sustainability ETF’s so far in March.
The five RBC ESG Darlings most often included in sustainable equity funds are Ecolab (30%), Xylem (29%), Aptiv (28%), American Water Works (26%) and Autodesk (25%). The four stocks that were dropped from RBC’s ESG Darlings were Intuit, Intel, Amgen and Waters.
Here is a look at RBC’s five recent additions to the ESG Darlings.
SolarEdge
SolarEdge Technologies Inc. (NASDAQ: SEDG) is one of two solar electronic components makers that RBC added to its ESG Darlings list. The company makes and sells direct current inverter systems and other solar-related products, including electricity storage systems. Its current market cap is around $16.6 billion, and its share price has increased by a third since February 23.
The stock is owned by 21% of ESG funds, the most of any of the newly added Darlings. SolarEdge’s relative return compared to the S&P 500 index for the year to date as of March 15 is 25%. Since the beginning of Russia’s invasion of Ukraine on February 24, the relative return is 35%.
Johnson Controls
Building products and systems maker Johnson Controls International PLC (NYSE: JCI) has a market cap of $45.46 billion. The company is headquartered in Ireland but was founded in Milwaukee in 1885 by the inventor of the electric room thermostat.
Johnson Control stock is owned by 16% of ESG funds, according to RBC’s report. The stock’s relative return for the year to date was negative 11.9%. Since the start of Putin’s war, the relative return has been sliced to negative 2.4%.
Estée Lauder
Cosmetics icon Estée Lauder Companies Inc. (NYSE: EL) has a market cap of $97.7 billion and is included in the portfolios of 15% of dedicated ESG funds.
As with the other funds on this list, the stock trades down for the year to date, although the share price has improved since the Russian invasion of Ukraine. For the year to date, Estée Lauder’s relative return is negative 17.6%. Since the invasion, the relative return is negative 9.8%.
Enphase
The other solar-related stock added to the ESG Darlings is Enphase Energy Inc. (NASDAQ: ENPH). The company’s principal product is a microinverter that converts solar energy from direct to alternating current at the individual module level, and couples that with technology to monitor and control solar-generated power. Enphase’s market cap is $24.22 billion.
The stock is included in the assets of 15% of sustainable equity funds but not traditional actively managed funds. Its year-to-date relative return is 2.4%, and its return since the invasion of Ukraine is 31.3%.
Ansys
Engineering simulation software provider Ansys Inc. (NASDAQ: ANSS) has a market cap of $27.01 billion, and the stock posted an all-time high in early November of last year. The company’s simulation tools in a variety of fields include aerospace, automotive, construction and consumer products.
The stock is also included in 15% of RBC’s ESG Darlings. Its relative rate of return for the year to date is negative 13.2%, but since the invasion of Ukraine, the relative rate of return is 1.7%.
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