Editor’s Note: A previous version of this article appeared on April 10, 2023.
Companies with wide moats are difficult to compete with. This advantage is especially appealing when paired with solid management of environmental, social, and governance risks.
In other words, durability and sustainability, also called ESG, are natural partners. ESG keeps a close eye on long-term risks that aren’t articulated by traditional finance.
All companies face some sustainability risk, not least because of the industries in which they operate. For example, an oil and gas company will be highly exposed to potential environmental problems, while a consumer technology business will be exposed to social risks like data privacy violations.
Indeed, Morningstar’s research finds that the biggest ESG risk is in energy and utilities, with the smallest in technology and real estate.
A company’s approach to sustainability demonstrates how it anticipates and addresses these long-term risks. Companies that mishandle ESG issues could incur significant economic costs that jeopardize their ability to earn long-term, maintainable profits.
Morningstar Sustainalytics measures this with the Sustainalytics ESG Risk Rating. It considers two main factors—exposure, or a company’s vulnerability to ESG risk, and management, which describes the actions taken by a company to manage a particular ESG issue—and blends them into a single score. The lower the number, the lower the risk.
In the table below, we refined our Best Companies to Own in 2023 list to highlight the ones with Morningstar ESG Risk Rating Assessments of Negligible or Low. This rating is based on the Sustainalytics ESG Risk Rating.
We didn’t include valuations for these companies. Rather, we focused on the criteria that set a company up for success in the long term. So, while not all of these names can be considered a buy today, this can serve as a great watchlist.
Here are the 52 companies that made the cut, ranked by the risk score.
Sustainalytics ESG Risk Rating Score
|Lowe’s Companies||LOW||Consumer Cyclical||11.78|
|Home Depot||HD||Consumer Cyclical||12.64|
|Thermo Fisher Scientific||TMO||Healthcare||12.81|
|S&P Global||SPGI||Financial Services||13.04|
|Automatic Data Processing||ADP||Industrials||13.82|
|Canadian National Railway||CNI||Industrials||13.97|
|Taiwan Semiconductor Manufacturing Company||TSM||Technology||14.62|
|Tractor Supply||TSCO||Consumer Cyclical||16.10|
|Expeditors International of Washington||EXPD||Industrials||16.56|
|Tradeweb Markets||TW||Financial Services||17.14|
|CME Group||CME||Financial Services||17.80|
|United Parcel Services||UPS||Industrials||18.57|
|American Express||AXP||Financial Services||18.61|
|Jack Henry & Associates||JKHY||Technology||18.66|
|West Pharmaceutical Services||WST||Healthcare||18.83|
|C.H. Robinson Worldwide||CHRW||Industrials||19.32|
|Yum China Holdings||YUMC||Consumer Cyclical||19.48|
|Toronto-Dominion Bank||TD||Financial Services||19.77|
You can explore the ESG Risk Rating score of each company under Morningstar coverage in the Sustainability tab of its stock quote page on Morningstar.com.
Keysight Technologies KEYS
Keysight Technologies is the leader in communications testing and measurement solutions. We think it has the strongest and broadest communications testing capabilities in the market across hardware, software, and services. Its wide Morningstar Economic Moat Rating, according to analyst William Kerwin, owes to “intangible assets in the design of test and measurement equipment and software and switching costs for its portfolio of solutions.”
Because of Keysight’s strong ESG reporting and oversight of ESG issues, Sustainalytics gives the company an ESG Risk Management rating of Strong. Sustainalytics notes that the firm has implemented a strong whistleblower program, has an adequate policy governing environmental issues, and employs solid social supply chain standards.
Keysight’s greatest material ESG issue is the risk of losing human capital to competitors, but we don’t think this is likely to happen, and we think the firm’s strong variable compensation program helps retain talent.
The only recent controversy attributed to Keysight is an investigation into alleged patent infringement practices. Still, this incident had minimal impact on Sustainalytics’ broader analysis of the firm’s ESG practices.
ASML Holding ASML
ASML is the leader in photolithography equipment for semiconductor manufacturers. Lithography tools account for a significant portion of chipmakers’ capital expenditures, with EUV platforms approaching $200 million in price. ASML’s immersion lithography tools allowed the company to capture and maintain the leading position in the marketplace.
Because of ASML’s low exposure to material ESG issues and its strong management, Sustainalytics assigns the company an ESG Risk Rating of Negligible. It is also ranked as having the lowest ESG risk within the semiconductor industry. Because of its status as a publicly traded company and the nature of its business, ASML is inherently exposed to baseline corporate governance risk, but its greatest ESG risk may be the potential scarcity of experienced engineering talent within the industry, though Morningstar believes ASML has exhibited an effective human capital management program.
Sustainalytics also notes that ASML is effectively integrating climate risk into its enterprise risk management process, with a goal to reach net-zero scope 1 and scope 2 emissions by 2025.
Despite having an overall “low” controversy level according to Sustainalytics, ASML did report a fire accident in its Berlin factory in January 2022, inviting doubts about the safety of its overall production environment.
Consulting firm Accenture’s risk is mainly related to its exposure to cyberattacks and its dependency on specialized talent, such as IT consultants and engineers, as it tries to keep up with client demand.
Accenture is taking sustainability considerations seriously. Accenture CEO Julie Sweet noted during a quarterly call that sustainability “is a critical area for which technology is still evolving. … We believe that every business must be a sustainable business, and yet companies are at very early stages of figuring out how to make this shift.”
Morningstar analyst Julie Bhusal Sharma is a fan, citing Accenture’s strong reputation for reliability and its “treasure-trove of institutionalized industry expertise and experience.” Accenture’s technological and strategic know-how, paired with its attention to sustainability considerations, is helping bolster profits. Accenture’s operating margin for the fourth quarter of fiscal year 2023 was 12%, and though this was a decline from a year prior, we believe this will be worth the short-term pain. Accenture expects its operating margin to be closer to 15% in fiscal year 2024.
Sustainable Companies Can Still Have Controversies
A spot on this list doesn’t mean that a company’s sustainability efforts are flawless.
For example, though Sustainalytics has assigned Experian EXPGY an overall ESG Risk Rating of Low, multiple data security incidents in the United States and Experian’s international subsidiaries have resulted in a Sustainalytics Controversy Rating of Significant. The frequency of these incidents has contributed to operational and reputational risk, as shareholders and customers may lose confidence in the company’s management.
Even so, Experian holds a spot in our catalog of sustainable companies because it is on the right track to improve data privacy and cybersecurity programs. The firm has started reporting according to the Sustainability Accounting Standards Board standards, which is a best practice, and has improved its quality management system to ensure secure data management. It also has Negligible risk ratings in the areas of business ethics and product governance.
Sustainable Companies Will Continue to Be Sustainable
Remember, this list is about long-term sustainability—not valuations. For guidance in that area, you can look to the Morningstar US Sustainability Moat Focus Index.
From that perspective, not all the names on this catalog of low-ESG-risk companies with wide moat ratings can be considered a buy at the moment. Still, for investors interested in managing long-term ESG risks, they’re worth keeping a close eye on.
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