ESG (environment, social, and governance) investing is one of the hottest trends on Wall and Bay Street, and no, it’s not just some fad that will die out like Bitcoin did last year. This may surprise you, but how environmentally or socially responsible a company acts could actually add intangible value that’ll ultimately be reflected in the stock price.
Millennials have shown that they care about the world and are willing to use their wallets to drive for the betterment of society at large. So, by investing in ESG-friendly securities, you’re not only going to get that warm and fuzzy feeling by doing the right thing, but you’re actually positioned to profit over the long term, as younger investors slowly but steadily move capital from environmentally or socially irresponsible firms to ESG-friendlier firms.
You know the controversial oil sands operator that doesn’t clean up after itself, lays off its employees on a regular basis, and couldn’t care less about its reputation?
Those companies will be punished, more so as the millennial generation grows to become a more influential force in the investment world. And vice-versa for the companies that are taking the extra effort to ensure they make a positive impact on the environment and society. That’s why almost every company has a web page that’s devoted to responsibilities to the community and the environment.
What’s the top industry to own as ESG becomes more ingrained with the average investor?
Renewables are a fantastic start. Not only do they have high yields and more predictable future cash flow streams, but they’re likely going to become more sought after by those ageing investors who genuinely care about society as much as they do corporate profitability.
Take TransAlta Renewables (TSX:RNW) as a prime example of an ESG-friendly investment that will have the wind to its back over the next 10, 20 and 30 years, as sustainable energy moves to the top of the list of things to own for investors who desire socially responsible investments.
The stock has a bountiful 8.1% dividend yield, close to the highest it’s been in recent memory due to a fairly steep decline experienced over the last two years. The renewable company, which is owned in majority by the ailing electrical power generator TransAlta, recently signed a 15-year wind power supply deal with an American customer and is slated to go into effect in Q2 2019. Although the payout ratio is stretched, the company can and likely will continue to hike its dividend by a single-digit percentage point for in 2019.
While TransAlta Renewables isn’t the fastest-growing or best-quality Canadian renewable, I think it’s got the most room to run given that shares are already steeply depressed. While there’s no question that TransAlta leaves a lot to be desired, I believe over the longer term that investors will be more than satisfied with the total returns they’ll get out of the ESG-friendly gem, so I’d say now’s a great time to lock in that huge 8.1% yield.
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Fool contributor Joey Frenette has no position in any of the stocks mentioned.