As ESG investing gains traction, RBC picks 10 under-the-radar stocks set to surge

Published Wed, Jun 30 202110:30 PM EDT

Lucy Handley @in/lucy-handley-b2b0a61a/@lucyhandley

RBC Capital Markets has named a number of sustainable stocks set to rise, spanning sectors including technology, energy and financials. The investment bank picked outperform-rated stocks with strong ESG (environmental, social or governance) attributes that aren't yet widely owned by sustainable funds. Some of the stocks "may be underappreciated" by these actively managed funds, the bank said, and as such there's potential for them to "climb the ownership rankings." In a note published June 24, RBS Capital Markets teamed with RBC's equity analysts to screen for the stocks, all of which have a market capitalization of $10 billion or more. It comes after assets under management in sustainable funds topped $1 trillion last year . Here are 10 of RBC's U.S. and global picks: Food and retail Fast-food firm Chipotle (CMG) is a pick for RBC, which said its sustainability efforts cover food and animals, people and the environment. "CMG was owned by 5% of actively managed global & US focused sustainable funds at the end of 1Q21," the analysts wrote, meaning it sits in the second quartile of ownership among the Russell Mid Cap Consumer Discretionary sector fund. Walmart is another pick for RBC analyst Scot Ciccarelli. "Walmart is in a far better ESG position than what many of the 3rd party ESG ratings are giving them credit for, in part due to the fact that it's likely being penalized for legacy issues," he wrote. The bank likes its renewable energy efforts, with the firm aiming to power 50% of its operations this way by 2025. Associated British Foods , which owns American cooking oil brand Mazola, is a pick because it has "many of the same ESG practices as some of its Best in Class Retail peers [Inditex, H & M ]," the analysts wrote. However, it also owns fast-fashion outlet Primark, which may have affected its position in ESG funds, RBC added. "Its recent ESG event was reassuring to us in several aspects," the analysts wrote, with initiatives including prioritizing quality over quantity when opening new stores. Tech Financial technology company Square (SQ) is a pick for its aim to have net zero carbon emissions by 2030 and efforts to switch energy-intensive bitcoin mining to greener alternatives. "SQ was owned by 8% of actively managed global and US focused sustainable equity funds as of 1Q21," the analysts said. RBC likes Docusign (DOCU) because it lets people sign documents digitally, therefore reducing the use of paper, and also for its diverse leadership team. "DOCU was owned by 5% of actively managed global and US focused sustainable equity funds as of 1Q21," the analysts wrote. Cloud software firm Okta launched an ESG program last year, and has integrated diversity goals into all of its business units, according to RBC. Okta was owned by 4% of actively managed global and U.S.-focused sustainable funds in the first quarter of this year, the bank added. Energy and materials Electricity firm AES is a pick for the bank as it has reduced its coal generation to 25% and expects that to fall to 10% by 2025. It's also aiming to be net zero by 2040. "We see this long-term target as leading the industry as many peers have targeted net-zero by 2050," the bank wrote. Norwegian energy firm Equinor is another RBS favorite for its effort to become carbon neutral by 2030, as well as its offshore wind operations. However, the bank said its oil and gas production would grow by about 3% per year between 2019 and 2026, though its scope 1 — or direct — emissions were below average. Metal can producer Crown is a pick for RBS because of its rising ESG standards, covering climate, resources and circularity. The bank said the stock is owned by 2% of actively managed global and U.S. sustainable equity funds. All of the stocks mentioned are on the bank's list of "ESG Contenders." "We see potential for these names to climb the ownership rankings," the analysts added.

People talk outside a Wal-Mart Pickup-Grocery store in Bentonville, Arkansas.

Rick Wilking | Reuters