FA Center: These 3 surprising stocks are held in ESG funds

Individual investors often rely on a company’s reputation to judge its performance in environmental, social and governance (ESG) factors. Institutional investors, by contrast, tend to take a more methodical approach in analyzing whether companies earn a favorable do-gooder rating. But investors might express surprise at some of the stocks that ESG funds include in their portfolios.

That’s likely because many investors may remember a scandal-laced headline for years while forgetting more recent admirable strides made by that same company. Julie Gorte, senior vice president at Pax World Funds, notes that negative news tends to garner more coverage — and exert more staying power — than positive developments.

“ESG starts with more obvious asset classes such as large-cap domestic,” Gorte said. “With these large companies, something’s more likely to get covered if it’s a bad thing.”

For example, people may remember how Microsoft  MSFT, +0.38%   CEO Satya Nadella commented in 2014 that rather than ask for a pay raise, women in IT should “[have] faith that the system will actually give you the right raises as you go along.” Few may know that, in August 2018, Microsoft announced that its 1,000-plus U.S. suppliers with more than 50 employees must offer workers a minimum of 12 weeks paid parental leave, for either a birth or adoption, up to $1,000 per week during their leave.

With that in mind, here are three companies that have met ESG standards and appear in socially responsible investing (SRI) mutual funds:

1. Nestle: When some people think of Nestle NSRGY, +0.68%  , a wave of disapproval washes over them. That’s due to allegations going back to the 1970s that the Swiss food and drink giant took steps to get mothers in less-developed countries to use its infant formula.

“The one thing they’ll remember about Nestle is its breast milk controversy,” Gorte said. “But Nestle has a lot of great policies such as its water use, and people are often surprised” when they see it in ESG portfolios. In 2017, it scored No. 1 in the food products category in the Dow Jones Sustainability Index.

2. BASF: Investors can assume that chemical companies hardly qualify as “green” stocks. But for some SRI investors, BASF BFFAF, -4.76% is an exception.

“BASF is one of the most sustainable companies in the world,” said Erika Karp, founder and chief executive of Cornerstone Capital Group. “It’s a big global chemical company that’s pretty remarkable in terms of its quality control, supply chain and safety record.”

Karp serves on BASF’s Stakeholder Advisory Council, so she’s familiar with its leadership, practices, and policies. BASF “is in lots of ESG funds,” she says, because the Germany-based company makes a “conscious effort to be ESG-friendly.”

3. Coca-Cola: Given the debate over the role of sugary beverages in fueling obesity, you’d think Coca-Cola KO, +0.16%   wouldn’t be considered for ESG funds. But its corporate social responsibility rating is actually quite high and it appears in some ESG funds.

“Coke was aware of climate change risk and took proactive measures to mitigate that material risk,” said George Michael Gerstein, an attorney at Stradley Ronon in Washington, D.C.

Read: Green New Deal could have a real impact on Corporate America. Here’s why 

More: Democrats’ ‘Green New Deal’ to eliminate U.S. carbon footprint by 2030

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