ESG investing has become more popular as investors consider the environmental, social, and governance aspects of their holdings. The idea of ESG investing may sound appealing. But in practice there is no agreed standard of what constitutes an ESG share.
Here are three shares I think have at least some ESG credentials. I consider whether I would add them to my portfolio – but only one attracts me right now.
Access to medicine leader
Well-known pharma giant GlaxoSmithKline (LSE: GSK) is often prominent on lists ranking shares by their ESG credentials. That is because of the company’s focus on broadening access to medicine. The company came top out of 20 pharma companies assessed in this year’s Access to Medicine Index. GSK’s pipeline includes drugs targeting priority diseases prevalent in poorer countries.
That may give GSK some credibility when it comes to ESG investing. But I feel the investment case for the company is more mixed. The relative weakness of its pipeline has worried analysts in recent years. The dividend of 5.6% is attractive for a FTSE 100 stalwart. But the company has indicated that it may effectively reduce the dividend after the imminent spin-off of its consumer division.
Despite improving steadily since the start of March, the GSK share price is still down 14% over the past year. That reflects investor nervousness about the strategic listlessness of the company and its pipeline. The spin-off could help bring more focus – but that isn’t guaranteed. I’m tempted by the yield, but for now am sitting out GSK to see how the spin-off goes.
ESG investing in recycling
Shares in recycling service providers are an obvious candidate for ESG investing. Should I consider buying shares in Augean (LSE: AUG), which specialises in hazardous waste management? From landfill sites to decommissioned oil rigs, Augean is involved in activities including waste treatment and recycling.
There has been talk of a possible bid for Augean. The deadline for a firm bid expired last week but has now been extended to next month. The Augean share price is up 59% in the past year. Augean shares now trade on a price-to-earnings ratio of almost 20.
I think the company has growth potential due to its specialist expertise at a time of heightening environmental standards. But after an increase following the news of a possible bid, I wouldn’t add the shares to my portfolio right now. If a bid doesn’t materialise, the shares risk returning to where they were before bid speculation emerged.
Closed loop recycling
Another company involved in recycling is paper and packaging firm D S Smith (LSE: SMDS). From an ESG investing perspective, its closed loop approach to recycling offers environmental benefits.
I also like D S Smith’s business performance and strategic focus. Last year, revenue and post-tax profits both fell due to the pandemic. But demand for packaging has surged due to an increase in online shopping. With its well-established operations in Europe and North America, D S Smith should benefit from that. The demand surge also poses a risk, though, as material prices have moved sharply up – something the company flagged in its results last week. That could hurt profit margins.
But with its proven ability to profit from paper and packaging, I would consider buying D S Smith for my portfolio.
Christopher Ruane has no shares in any company mentioned. The Motley Fool UK has recommended DS Smith and GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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