ESG investing has been in existence for the last several years, but has gained significant ground recently. Along with risk and return potential, investors now focus on one additional factor: a social impact. Millennial investors are more and more of the opinion that returns can still be gained with sustainable business practices.
ESG is environmental, social, and governance. This group of investors abandon sin stocks like tobacco, alcohol companies or those involve in fossil fuel operations in favour of more interest in those that are environmentally friendly or have a positive social impact.
Company managers are also increasingly focused on sustainability these days and are investing in strategies to reduce carbon footprints.
ESG investing in TSX stocks
An emerging Canadian start-up, Facedrive (TSXV:FD) is a carbon-neutral ride-sharing platform. Unlike Uber, it offers riders options like EVs, hybrids, or traditional gas-fueled vehicles to choose from. Also, riders can check the environmental impact after each of their rides.
Founded in 2016, Facedrive plans to expand in the U.S. and Europe in the next few years. Investors have been increasingly believing in its growth story recently. Approximately two years ago, Facedrive stock was trading below $1, while it breached $11 levels mid-May.
Renewable power company Northland Power (TSX: NPI) is but another example. It owns, operates, and develops sustainable, green power infrastructure across Canada, South America, Europe, and Asia. Its EBITDA has grown 145% in the last five years.
The same has influenced its market performance in this period more than doubling its stock. Northland Power pays monthly dividends and yields 4.1% at the moment. The company has been paying consistent dividends since 1997.
The power generation markets are shifting from fossil fuels to renewables. While there is still a long way to go in terms of renewables penetration, Northland Power has strong growth potential for the future.
Another one is Canadian clean energy fuel cell solutions provider Ballard Power Systems (TSX: BLDP)(NASDAQ: BLDP).
Ballard Power makes customized hydrogen fuel cells mainly for heavy- and medium-duty vehicles. It aims to provide zero-emission solutions for the automobile industry.
Hydrogen fuel cells are clean energy alternatives and are significantly more efficient compared to traditional sources. As we are gradually shifting away from fossil fuels and adopting cleaner energy solutions, fuel cell companies offer attractive growth prospects for the future.
While Ballard Power has seen fair revenue growth in the last few years, it remains a loss-making venture at the moment. Notably, the stock has surged almost 55% so far this year.
Foolish takeaway
There are several reasons why ESG investing is becoming increasingly popular. Social and environmental issues are increasingly becoming some of the dominant factors in millennials’ decision making.
However, ESG investing is still in the nascent stages. Investors need to do more research, as companies can be vague on purpose in their sustainability report. For instance, every other company cites a goal of “lessening the environmental impact” or “becoming e a socially responsible company,” whereas their actual efforts could be quite minimal.
I think strong ESG traits in a company highlight a better management team and its long-term thinking. It suggests that the management considers all its stakeholders, including the environment and community — not just concerned about the company’s profits.
