Wall Street analysts say sustainable investing is being shaken up — and name the stocks to cash in

Published Thu, Mar 24 202211:36 PM EDT

Conventional wisdom about sustainable investing is being challenged right now, analysts say — and it's creating some investment opportunities. Here are Wall Street's top picks to navigate an evolving sector. Despite record 2021 inflows into ESG stocks — which have a focus on Environmental, Social, and Governance factors — inflation and war are weighing on performance and flows so far this year, according to Bernstein. "In particular, rising energy prices and the underperformance of clean energy have challenged conventional wisdom about ESG," the bank's analyst Zhihan Ma said on Mar. 23. This view was echoed by Goldman Sachs , which said that concerns about inflation and the conflict had led some ESG investors to consider stocks relating to commodities and "business activities that, despite negative externalities, serve critical societal needs, such as energy and defense." Read more Bank of America names top stock picks as Russia-Ukraine conflict hastens Europe’s energy transition "This could help bring greater balance to the debate and increased willingness by ESG investors to own — and engage with — companies in controversial industries," Goldman's analysts, led by Derek Bingham, also said on Mar. 23. Goldman's stock picks Goldman noted that while a divestment approach — when investors divest stakes in companies which do not meet set ESG criteria — has momentum right now, there were early signs the tide was turning toward a less rigid "engagement" approach. The latter allows ESG portfolio managers to retain their long-term competitiveness and avoid limiting "alpha opportunities" in companies with improving ESG metrics, according to Goldman. The bank identified several stocks that could benefit from a more balanced debate on the issue. These includes potential "winners" in carbon-intensive or extractive industries, which could benefit from European regulation that gives credit to both green sectors like renewables, as well as transition categories such as chemicals, steel, aluminum, biofuel and hydrogen. Within this space, the bank's top picks are French aluminum products manufacturer Constellium , Italian energy firm Eni , Swiss building materials manufacturer Holcim and Norwegian aluminum producer Norsk Hydro . Goldman also likes "ESG improvers" in heavy industries. Its favorite stocks here include oil majors BP and TotalEnergies , as well as Canadian miner Teck Resources — companies which the bank says could see rising green revenue and capital expenditure. The bank also likes companies in "categories of critical need" such as defense, energy and mining. Read more Forget Tesla — this auto stock is the one to buy right now, analyst says "Particularly given the Ukraine conflict, among commodities, we believe strong free cash flow trends could increase investors' willingness to own stocks in these sectors with the purpose of engaging to influence how free cash flow is deployed—either via reinvesting or returning to shareholders," Bingham said. The bank's top picks in this space are Cheniere Energy , U.S. oil exploration firm Pioneer Natural Resources , mining firm Anglo American , aluminium producer Alcoa , Airbus and Canadian aviation technology company CAE . JPMorgan's stock picks In a note entitled "Finding the jewels among polluting industries" from Mar. 17, JPMorgan also identified a list of so-called ESG improvers which it says are underappreciated by investors and rating agencies. Its top picks include utility stocks HK Electric Investments , India's Tata Power and Thailand's Global Power Synergy for their promising transition towards renewable energy. The bank also likes cement companies that include India's ACC, Ambuja Cements and UltraTech as well as Taiwan Cement for their science-based emission reduction plans. South Korea's Hyundai Steel and Indian state-owned energy firm Bharat Petroleum also makes the bank's list for their low carbon intensity relative to peers, as well as better insulation against potential cost from carbon pricing schemes.

The New York Stock Exchange in lower Manhattan on Nov. 24, 2020 in New York City.

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