Morgan Stanley says these stocks are making improvements on ESG that can also boost returns

Published Sun, Feb 19 20238:23 AM EST

Morgan Stanley honed in on publicly traded companies that are improving on ESG in ways that can boost shareholder returns. Analyst Stephen Byrd's team highlighted a "rate of change" metric that gauges how much of an improvement a company is making on environmental, social and governance issues — and how that can help a business grow revenue and margins. These stocks also offer attractive risk-rewards, he said. "We think ESG rate of change will be a critical focus for investors looking to identify companies that can generate alpha and ESG impact," he said in a note to clients in late 2022. Byrd focused on finding stocks that are, in his words, "in transition" to a more ESG-focused future as opposed to those already considered leaders in the area. Though he said both approaches to ESG screens can be useful, he specifically looked for companies doing under-the-radar ESG work. To find these, Byrd's team established a forward-looking rate of change with sector analysts and create sector-specific ESG guidance. He then worked with the quantitative investing team to look at shareholder returns in relation to ESG criteria. Each stock on his list is rated overweight by the firm. CNBC Pro then screened his list for U.S. stocks that are liked more broadly by Wall Street analysts. The screen filtered for stocks rated buy, or overweight, by more than 50% of analysts and have an average price target implying upside of more than 10% in the next 12 months. All data is from FactSet as of Wednesday. Here's the 10 rising starts that passed CNBC Pro's screen: Energy and utilities stocks accounted for the bulk of the list. One of the companies, New Fortress Energy , has the the largest potential upside on the list at about 60%. Eighty-percent of analysts rate the stock a buy, FactSet data shows. Byrd pointed to the company's plans for a green hydrogen plant and a system for providing low-cost feedstock gas. It's also creating power facilities that can operate on 95% pure hydrogen with no incremental investment, while also pushing oil-to-gas transitions with customers. Capital expenditures related to new energy are expected to account for between around 84% by 2024. The company has a goal of net-zero carbon emissions by 2030. Chemical company Linde , meanwhile, caught Byrd's eye because it's targeting a 35% reduction in greenhouse gas emissions by 2035. The company is planning to put between $7 billion and $9 billion toward clean energy projects in the coming years, while also collaborating with SLB to develop decarbonization projects. More than 80% of analysts covering the stock have buy or overweight ratings on it. The average analyst calls for more than 12% upside over the next year. Outside of those sectors, Deere also made the list. Roughly two-thirds of analysts rate the stock as buy or overweight, and the average price target implies upside of nearly 15%. Deere has developed technologies to reduce fertilizer usage by 50%-90% while also offering electric alternatives within turf and compact utility products. Morgan Stanley expects these changes to help grow margins by about 110 basis points between 2023 and 2025. DE YTD mountain DE in 2023 The most-liked stock on the list was banking and data company S & P Global , with 91% of analysts rating it a buy or overweight. S & P Global is supporting companies with the energy transition through ratings for green bonds , ESG scores, sustainability-related notes and a research lab focused on diversity, according to Byrd. He said ESG-related revenue should increase at a compound annual rate of 46% through 2025 to reach $600 million. — CNBC's Michael Bloom contributed to this report.