The best ESG stocks are those that are smack in the middle of a developing trend. Between the global push toward net zero and a renewed focus on energy security, the energy transition is exactly that. The war in Ukraine’s had a huge impact on the way the world sees energy. With Russian supplies now off the table, there’s been somewhat of a backslide to new oil and gas drilling projects. While this will set us back in the race to net zero, uncertainty in the energy market has also driven policymakers to plough money in to alternative energy supplies in an effort to diversify. That means cleaner technology like wind, solar and hydrogen are seeing their growth runways expand considerably.
The United States’ landmark Inflation Reduction Act offered generous tax cuts to renewables providers in a bid to spur on innovation in the sector. It made it much more attractive to be a clean energy provider operating in the U.S. Not to be outdone, the E.U.’s offering up its own support package in a bid to hold on to the industry and keep it growing on its own soil. With these two heavyweights fighting tooth and nail to lure clean energy operators into their back yards, it should be clear that this is an industry with growth ahead.
We’re still a ways off from hitting net zero, and a lot can happen over the next 20 years. But the energy transition will be one of the biggest shifts in our lifetime, and the best ESG stocks could be the next Amazons and Apples.
Air Products (APD)
Source: Andy Borysowski / Shutterstock.com
Hydrogen is a key part of the transition to cleaner energy. If we’re going to get to net zero by 2050 as planned, it will need to make up about 10% of the global energy mix —that’s a huge jump from the 0.1% it accounts for today. So the opportunity for growth here is massive. One of the best ESG stocks to consider here is Air Products (NYSE:APD). It is in the process of building out America’s largest green hydrogen facility and it has a few other low-carbon hydrogen projects dotted in other parts of the word. For now it’s only a small, unprofitable part of the business, though it should yield some appealing tax breaks.
This part of Air Product’s business is its future — but the present looks pretty good as well. The group supplies industrial gas, which is a relatively insulated place to be. Customers tend to be pretty reliable with long-term contracts. Profitability looks set to improve as well following a cost cutting program that’s expected to bring operating margins in to the low 20%range.
A solid business like this doesn’t come cheap, though. Shares change hands for 28 times earnings. Still with all of the potential ahead, Air Products looks like a good bet on a sustainable future.
NextEra Energy (NEE)
Source: madamF / Shutterstock.com
NextEra (NYSE:NEE) is a utility company that both makes and distributes energy throughout Florida. On the production side you have NextEra Energy Resources (NEER). Most of the energy this part of the business produces comes from renewable sources, making it one of the world’s largest wind and solar generators. But what makes NextEra one of the best ESG stocks for investors looking to capitalize on the shift toward sustainability is the fact that NEER is responsible for about 40% of underlying profits. So it’s a meaningful part of the business.
The distribution side, Florida Power and Light, is responsible for the rest. Most of the energy it distributes comes from natural gas — which is cleaner than things like coal and oil, but still a fossil fuel. FPL is working to shift this to be more reliant on solar, which will take time and investment.
NextEra’s status as a utility adds a layer of protection. Everyone needs to keep the lights on no matter what the economy is like. And on top of that the group’s got a growth story, a rarity for utility stocks.
Schneider Electric (SBGSY)
While the other two stocks on this list offer different ways to make energy, Schneider Electric (OTCMKTS:SBGSY) is giving us ways to save it. The French company offers energy management solutions for businesses around the world and it is one of the best ESG stocks for investors looking for a pure play on the transition.
What sets it apart is their commitment to making the world a little bit greener. Clean energy isn’t just a meaningful part of the business — it’s almost the whole thing. At last check, revenue supporting things like the circular economy and decarbonization, dubbed “impact revenue,” made up almost three-quarters of the total. That’s expected to rise to 80% by 2025.
A lot of that income is dropping through to profits — underlying margins were over 17% last year. That’s expected to continue growing in the year ahead as well. The kind of growth Schneider has on offer comes at a premium price tag, with shares trading at around 25 times earnings. However for investors that want a pure-play on sustainable energy, Schneider Electric stock is one of the best picks around.
On the date of publication, Marie Brodbeck 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.
Marie Brodbeck has a Finance degree from Duquesne University and has been a financial journalist for more than a decade. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN.