ESG investing is increasingly popular with both private and institutional investors. I think that will be the case for many years to come, which could benefit shares with good ESG credentials. That means those companies that have good environmental, social and governance standards.
This is borne out by the evidence. Clients of stockbroker Hargreaves Lansdown have upped their net purchases of responsible investment funds forty-fold in four years. That’s quite a pace of change.
On the basis that ESG stocks should do well as money pours in for ESG-friendly investments, I’m thinking SSE (LSE: SSE) could be a good pick for my portfolio.
SSE is ideal for ESG investing
The energy company has been transitioning to renewables for a long time so has a head start on many of the oil companies that are now trying to catch up. That lessens the risk that SSE is simply greenwashing and to me indicates that it’s ahead of the curve when it comes to helping the UK become carbon-neutral – something that has serious political support.
SSE has a portfolio of around 4GW of onshore wind, offshore wind and hydro. It’s aiming to treble its renewable energy output from 2019 levels to 30TWh by 2030.
It operates in the UK and Ireland so is in very socially and politically stable countries, which lessens the risk of nasty surprises that can come with operating in some parts of the world.
I think SSE presents a turnaround opportunity as well, so has some appeal for me as a value investment. The financials have been getting consecutively worse for a few years, but I believe much of that is down to investment in the future and building the energy-generating capacity.
It’s this investment, known as capex, which is an ongoing risk. The amount of money needed to meet its ambitions for producing renewable energy is very high. That puts pressure on the dividend and the balance sheet.
However, with a dividend yield above 5%, SSE is a decent income stock, in my opinion. It’s also well positioned for ESG investing and has made good progress over recent years. Management deserves a lot of credit and I’d be prepared to back them with my own money.
How else to invest ethically?
If I didn’t want to pick an individual share to benefit from the rise of ESG investments, then I’d instead pick a fund or a trust with a good record. Examples include Royal London Sustainable Leaders and Liontrust UK Ethical. The former invests in Prudential, Experian and Unilever, while the latter has National Express, Countryside Properties and Prudential as its top three holdings.
Investing ethically is no longer just for the socially conscious, in my opinion. I think ESG investing could be good for the planet and for the value of my Stocks and Shares ISA.
