Credit Suisse says these highly rated ESG stocks have attractive valuations and growth

Published Wed, Oct 20 20213:03 PM EDTUpdated Wed, Oct 20 20216:17 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Top-rated stocks with a sustainable investing bend may be more costly than the broader market, but Credit Suisse has come up with a group of names that have high ratings, attractive valuations and strong growth prospects. Credit Suisse co-head of quantitative research Patrick Palfrey screened the S & P 500 for companies with the best ESG ratings against their peers. ESG is short for investing based on environmental, social and governance criteria. Palfrey said investors should be careful about how they pick companies for ESG traits, and some investors make the mistake of assuming the companies with top ratings for sustainability will automatically be quality holdings. "There is an overlap. All else equal, you're likely to pick a high quality company if you pick an ESG company. To say they can be used interchangeably is an oversimplification," Palfrey said. "Companies with high ESG scores historically have grown slower, but they've also been valued higher." Stocks of companies with high ESG score have higher valuations than those with low scores. But their revenues are expected to just grow slightly slower, by 0.6%, less than lower rated companies, Palfrey found. He used the MSCI ratings for the companies he screened. The stocks Palfrey found that were better rated than their peers overall for ESG characteristics did not rate in the upper third for each of the environmental, social and governance categories. For instance, CBRE, a real estate investment trust, was in the highest third among its peers in the S & P 500, based on its ESG rating. The stock was in the the lower third for environmental, but in the top third for social and governance. CBRE was one of eight stocks Palfrey found that was in the top third of ESG and also was in the top third of REITs in terms of 12-month forward price-earnings and sales growth. Alaska Air, Colgate Palmolive and Robert Half were also among the companies on Palfrey's list of 31 companies that met those criteria. The companies also varied within their ESG ratings. T. Rowe Price, for example, was in the top third of financials for ESG, but it was neutral, or in the middle third of financials on environment, while in the upper third for social and governance. It was also in the middle third, based on its forward price-to-earnings ratio. Halliburton and Oneok were in the top third of energy companies for ESG ratings, but were in the middle third for both social and governance criteria. Halliburton was in the middle third of energy companies in both sales growth and forward price-earnings and Oneok was at the top for sales growth but in the middle third for price-earnings, according to Credit Suisse.

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