Over the past decade, Wall Street has been paying close attention to environmental, social, and governance (ESG) factors, while investing in sustainable stocks has gained significant traction. Fund managers are also increasingly prioritizing ESG stocks, aligning with the views of many investors.
A strong ESG rating from reputable agencies like MSCI or Sustainalytics, which is part of Morningstar (NASDAQ:MORN), has become a critical benchmark for evaluating ESG stocks. Companies with high ESG ratings typically are industry leaders, committed to sustainability, transparency, and ethical practices. These companies often demonstrate robust financial performance, as they are better equipped to manage risks and capitalize on new opportunities. For instance, research by Morningstar suggests that 59% of sustainable funds outperformed their traditional peers over a 10-year period.
Today, we explore three top ESG stocks to enhance any investment portfolio. As the demand for sustainable stocks grows, these choices could contribute to a more equitable future for both investors and the environment.
Hess (HES)
We begin our discussion on ESG stocks with Hess (NYSE:HES), a key player in the offshore oil and gas industry. Hess stands out for its strategic investments in renewable energy and commitment to achieving net-zero emissions. The company demonstrates how traditional energy firms can adapt to evolving sustainability demands. Moreover, it holds an AAA rating from MSCI.
In October 2023, Chevron (NYSE:CVX) announced plans to acquire Hess in a $53 billion deal. However, the transaction faces hurdles like an ongoing arbitration with Exxon Mobil (NYSE:XOM), regarding Hess’s Guyana operations. Delays in the arbitration panel’s decision on Exxon’s right of first refusal have complicated the merger process.
Hess recently reported solid first-quarter 2024 earnings. Oil and gas production was up 27% year-over-year (YOY), driving a substantial 36% revenue growth. EPS jumped to $3.16 from $1.13 in the prior-year quarter.
Upon completion of the Chevron merger, analysts foresee Hess gaining enhanced exposure to the Guyana basin, indicating a potential upside for HES stock. Planned regular additions of new production platforms highlight promising growth prospects.
Year-to-date (YTD), HES stock has gained around 2%, supported by a 1.2% dividend yield. Shares are changing hands at 15.4 times forward earnings and 4.0 times trailing sales. Analysts’ 12-month median price target of $166.50 indicates a potential 13% upside from current levels.
KBR (KBR)
Next on today’s list of sustainable stocks is the engineering and consulting firm KBR (NYSE:KBR). The company specializes in defense, government, construction, and sustainable technology solutions. KBR distinguishes itself in the sustainable technology sector through its Zero Harm ESG program. MSCI has recognized its sustainable solutions as KBR holds the coveted AAA rating as well.
On April 30, KBR reported its first quarter 2024 results. Revenue grew 7% YOY to $1.8 billion, driven by double-digit growth in its Sustainable Technology Solutions segment. Adjusted EPS also rose by 15% YOY to 77 cents.
A key revenue driver for KBR remains its Government Solutions segment. It is benefiting from rising demand in defense and intelligence markets due to geopolitical tensions. Recently, KBR secured a five-year contract, valued at $46 million, to support the Iraqi government’s infrastructure and energy initiatives.
Moreover, KBR is well-positioned to capitalize on the clean energy transition, especially with its leading Hydrogen & Ammonia Technology. This sector is expected to drive licensing revenues and improve margins, traditionally influenced by government contracts.
So far this year, KBR stock has surged over 15%, complemented by almost a 1.0% dividend yield. Shares are trading at 19.6 times adjusted forward earnings and 1.2 times trailing sales. Analysts’ 12-month price forecasts suggest a 20% upside potential from current levels.
Workiva (WK)
We conclude today’s discussion of ESG stocks with Workiva (NYSE:WK). Workiva provides regulatory, financial, and ESG reporting solutions, simplifying processes for organizations to meet regulatory requirements and achieve sustainability goals.
In the first quarter 2024, WK reported robust financial performance, with total revenues growing 17% YOY to $176 million. Subscription revenues also rose by 20%. The company significantly reduced its net loss by 74% YOY to $12 million. Adjusted diluted EPS was 22 cents compared to a loss per share of 12 cents in the first quarter of 2023.
Looking forward, ESG reporting is anticipated to drive future growth, especially as governments expand ESG reporting regulations. Workiva launched Workiva Carbon in June 2024, facilitating organizations in measuring, managing, and reporting carbon emissions. Integration with audits to support regulatory demands presents further growth prospects. Despite these advancements and a 34% YOY increase in high-value customers, management’s conservative growth projections have weighed on the stock.
Since January, WK stock has declined nearly 28% due to macroeconomic uncertainties and cautious customer spending. Yet, Wall Street holds a positive outlook, setting a 12-month price target of $105.00, a potential 43% upside.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
