Say hello to ESG investing, a little known term today that will become one of the most important investment themes of the 2020s.
ESG investing â€” short for environmental, social and governance â€” considers the environmental, social and governance implications of an investment, in addition to the financial implications. In the stock market, ESG investing is one of the hottest trends right now. According to data from Morningstar, investors poured a record $21 billion into ESG funds in 2019, up nearly four-fold from the prior year. Those record inflows helped drive record performance in ESG stocks. Over the past year, every major ESG exchange-traded fund has outperformed the S&P 500 by a few points.
Why is this whole ESG shift happening now? Because ESG investing is finally moving into the mainstream spotlight.
Pushed by rising consumer awareness of ESG impacts, fund managers are making big changes to their investment strategies. Most notably, BlackRock (NYSE:BLK) â€” the worldâ€™s largest asset manager with $7 trillion in assets under management â€” recently announced it would demand greater disclosure from all firms with respect to their carbon emissions, double their number of sustainable fund offerings and dump stock in firms that earn more than a quarter of their revenues from thermal coal.
Those are big changes. And they are just the tip of the iceberg.
Over the next decade, ESG investing will gain tremendous momentum, aided by a consumer preference shift for ESG-positive products and services, as well as increased institutional investor support for ESG-positive stocks. As this happens, ESG stocks will outperform, both because they will have better growth profiles and higher investor demand.
With that in mind, letâ€™s take a look at five ESG stocks to buy-and-hold for the next decade.
The most notable and biggest ESG stock in the market is Tesla, the $150 billion electric car company whose shares are up a whopping 100% in 2020.
Many chalk up the big rally in Tesla to growing global demand for the companyâ€™s fleet of premium electric cars. Others chalk it up to falling electric battery costs and improving margins and cash flow. Still others think the rally is largely a byproduct of short squeezing, as short sellers have rushed to cover over the past few months amid some critical operational improvements at the company.
All of those things are true. So is the fact that institutional and retail investors are increasingly pouring money into ESG funds, and that all of these massive inflows get at least partially allocated to Tesla, which is the poster boy for ESG stocks.
More importantly, all of these favorable dynamics will remain in play for the next decade.
Consumer demand for electric cars will continue to rise, powered by government subsidies and a shift in consumer preference towards clean energy vehicles. Battery costs will keep falling, factory utilization rates will keep rising, and profit margins will keep expanding. About 20% of the float is still short, so thereâ€™s still a lot of short covering firepower left. And, institutional and retail money will continue to flow into ESG funds in support of positive ESG changes.
As all those favorable dynamics persists, so will strength in Tesla stock.
Teslaâ€™s little brother on the other side of the Pacific Ocean, Nio, is another premium electric vehicle company that has a bright future.
There are some critical differences between Nio and Tesla. Namely, Tesla is a $165 billion company, selling hundreds of thousands of cars a year across the globe, with billions of dollars on the balance sheet. Theyâ€™ve been at the electric vehicle game for about a decade. Meanwhile, Nio is a $3.8 billion company, selling a couple thousand cars a quarter in China, with a cash-strapped balance sheet. Nio sold its first electric car in 2018.
Sure, those are someÂ bigÂ differences. Strip them away, and the core strategy of each company is the same. One: build premium electric cars. Two: establish strong brand equity around those premium electric cars. Three: leverage that brand equity and rising electric car consumption trends to consistently launch new, high-demand vehicles. Four: grow volumes and sales. Five: leverage economies of scale to drive margins higher and steer the company into consistently profitable territory.
In other words, for all intents and purposes, Nio is Teslaâ€™s little brother. The company will never be as big or as successful as Tesla. But, they will morph into a strong premium player in Chinaâ€™s burgeoning electric vehicle market, implying that big growth at Nio will stick around for many years to come.
One ESG stock which seems to have found its groove lately and which has a visible runway to sustaining that groove for the next several years is Plug Power.
Plug Power is a hydrogen fuel cell (HFC) maker. In essence, HFCs are alternative clean energy sources, like electric batteries, except instead of drawing their power from an outlet like an electric battery, they convert hydrogen and oxygen into energy. To date, HFCs have not gained mainstream traction as a clean energy source for various reasons, mostly because all the growth in clean energy demand has been in the commercial car market. In that market, there is significantly larger and better charging infrastructure for electric batteries than for HFCs.
But, HFCs are starting to gain significant traction in a different market: the material handling industry.
Specifically, there is growing pressure on corporations to cut carbon emissions. But, doing so can be cost intensive. So, in recent years, companies have increasingly sought out cost-effective ways to cut carbon emissions. Deploying HFCs in the warehouses, via hydrogen powered forklifts, is one to do so. Thatâ€™s because, relative to electric battery powered forklifts, hydrogen powered forklifts last longer per each charge, have shorter recharging times, require less storage space and maintenance, and have longer shelf lives.
It should be no surprise, then, that mega corporations like Walmart (NYSE:WMT), Amazon (NASDAQ:AMZN), and Home Depot (NYSE:HD) are increasingly deploying HFC forklifts across their warehouses. When they do, they are using Plug Powerâ€™s technology, because Plug Power is the premiere company in this space.
Over the next few years, this trend will only accelerate. More companies will adopt HFC forklifts as they look for cost-effective ways to cut carbon emissions. Plug Power will land more and bigger contracts. The companyâ€™s revenues and profits will soar. As will the stock price, which is already up 210% over the past year.
Moving away from the clean energy space for a moment, another way to play the ESG investment trend is to buy shares of plant-based meat maker Beyond Meat.
Consumer demand is increasingly shifting towards ESG-positive products and services. As it does, consumers are increasingly pivoting towards plant-based meat consumption.
Thatâ€™s because plant-based meats reduce carbon emissions. Up to 50% of greenhouse gas emissions are driven by livestock rearing and processing. They also conserve resources, since livestock accounts for about 80% of all agricultural land and 30% of all agricultural water usage. Not to mention, plant-based meats improve animal welfare (about 70 billion farm animals are reared each year for food) and personal health (plant-based diets have been shown to reduce heart failure risk by more than 40%).
Broadly, then, plant-based meat consumption is an ESG-positive trend. As such, it will grow exponentially over the next decade.
Beyond Meat will be at the epicenter of this exponential growth. The company will leverage distribution, brand equity, and technological advantages to sustain leadership in this burgeoning market for the foreseeable future. Eventually, Beyond Meat will turn into the Tesla of the plant-based meat category.
As this megatrend unfolds over the next decade, Beyond Meatâ€™s revenues, profits, and stock price will all roar higher.
Leading renewable energy and battery storage company NextEra EnergyÂ is another strong stock to buy to play the ESG investment theme of the 2020s.
In a nutshell, the renewable energy space is positioned for huge growth over the next decade. Demand for renewable energy sill grow exponentially, because: 1) consumers will increasingly want to shift towards clean energy as they become more aware of ESG impacts, 2) governments globally will help support that growing demand with subsidies, 3) the costs of renewable energy will come down with scale, and 4) the efficiency of renewables will go up with technological improvements.
At the same time, supply will adjust to shifting demand, and companies will pour more and more money into clean energy projects in the coming years.
Thatâ€™s great news for NextEra Energy, who is widely considered Americaâ€™s leading clean energy company, with a huge footprint in solar and wind power, as well as battery storage. This leading position in a secular growth market is why NextEraâ€™s stock price is up a whopping 120% over the past five years.
Itâ€™s also why the stock will stay hot for the next decade. Demand for renewable energy will grow exponentially in the 2020s. As it does, renewable energy companies like NextEra will see their revenues, profits, and stock prices all move way higher.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the worldâ€™s top stock pickers by TipRanks, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.