In this article, we discuss the top 12 ESG companies in 2022. If you want to skip our detailed introduction of the ESG investing dynamics and challenges in the industry, you can go directly to read Top 5 ESG Companies in 2022.
Over the past few years the concept of ESG has evolved dramatically. Environmental, Social, and Governance principles no longer belong to the vague realm of fancy words but rather play a key role in investing circles. Environmentally-conscious investors and activist hedge funds now pay serious attention to ESG metrics of companies before making investment decisions. Data from Bloomberg Intelligence shows that global ESG assets are expected to surpass a whopping $50 trillion by 2025.
Regulatory pressure from governments around the world is also causing the companies to take ESG seriously. The Securities and Exchange Commission is working to develop a common benchmark on how sustainable products are assessed and reported. However, as outlined in the whitepaper titled in detail, this pressure is resulting in a backlash from several circles. Many fund managers believe these ESG regulations sometimes tend to be too harsh, and can affect their ability to perform to ensure maximum returns for their clients.
A Key Challenge in ESG Investing
It’s also becoming increasingly difficult for average investors as well as fund managers and asset owners to assess ESG risks of companies they want to invest in. Apparently, ESG rating agencies solve this problem. They evaluate companies and provide ESG risk scores and ratings based on their analysis. However, these ratings could further confuse the investor. This is the problem highlighted in the whitepaper we referred to above, authored by Steve Glass, the co-CEO of Abel Noser Holdings, a New York-based firm that provides Transaction Cost Analysis (TCA) and trade surveillance for investment managers and consultants.
The whitepaper argues that because of the lack of standardization and benchmarking in the industry, each ESG ratings agency uses different data sources, methodologies and processes to assess a company. This results in huge variance and subjectivity in ESG scores.
The whitepaper recommends using machine learning and AI to resolve this problem. The paper mentions an interesting example of OWL ESG, a California-based ESG analysis company that uses machine learning to process millions of data points from a plethora of sources to come up with consensus ESG ratings. These consensus ratings minimize divergence and discrepancies in ESG ratings.
For this article we used the latest datasets of Just Capital. Just Capital, a not-for-profit founded in 2013 by popular individuals like billionaire Paul Tudor Jones, Deepak Chopra, Rinaldo Brutoco, Arianna Huffington, Paul Scialla, Alan Fleischmann, among others, is striving to solve major problems related to environment, gender, racial justice and equality.
Just Capital ranks the largest US companies based on their performance related to issues concerning environment, workers, customers, communities and shareholders. The company comprehensively surveys the American public based on its 241 individual ESG data points to reach its rankings.
We focused more on the environmental aspect of the ESG matrix of these companies and talked about the projects and investments these companies have committed to in order to tackle the existential crisis of climate change.
Top 12 ESG Companies in 2022
12. Exelon Corporation (NASDAQ:EXC)
Exelon Corporation (NASDAQ:EXC) is an Illinois-based utilities services company that owns nuclear, fossil, wind, hydroelectric, biomass, and solar generating facilities. According to its ESG report published in June last year, Exelon Corporation (NASDAQ:EXC) claims to be the largest producer of zero-carbon electricity in the U.S. In February this year, Exelon completed its split of power generation and competitive energy business. Exelon’s power generation and retail energy business, now known as Constellation Energy Corp., started trading publicly on February 2. Exelon Corporation (NASDAQ:EXC)’s CFO Joseph Nigro thinks that the new, simplified structure will make the company more attractive for ESG investors.
Investment firm UBS agreed with that notion in a report published after the split, saying:
“Exelon post-spin has a clean profile that fits into most ESG funds metrics, even if an exclusionary, already clean approach is used versus a rate of change approach.”
11. PepsiCo, Inc. (NYSE:PEP)
PepsiCo, Inc. (NASDAQ:PEP) in January last year announced that it plans to achieve net-zero greenhouse gas emissions across its supply chain by 2040. PepsiCo, Inc. (NASDAQ:PEP) said in its ESG report that it’s working to promote regenerative agricultural practices, which make soil healthier and reduce carbon from the environment. In 2021, the company spread these agricultural practices to 345,000 acres. Pepsi has also set an ambitious goal of making 100% of its packaging recyclable, compostable, biodegradable or reusable.
PepsiCo, Inc. (NASDAQ:PEP) produced about 57 million metric tonnes of greenhouse gas emissions (GHQ) all over the world in 2019. Over the next nine years, it is hoping to reduce this figure to just 26 million metric tonnes.
10. Cisco Systems Inc. (NASDAQ:CSCO)
Digital communications giant Cisco Systems Inc (NASDAQ:CSCO) is one of the top 12 ESG companies, with an ESG risk score of just 12 and several ESG-related projects under its belt. In September last year, Cisco Systems Inc (NASDAQ:CSCO) announced plans to reach net-zero emissions across all scopes by 2040. Cisco Systems Inc (NASDAQ:CSCO) has set a short-term goal to reach net zero for all global Scope 1 and Scope 2 emissions by 2025. Scope 1 emissions are defined as emissions from owned or controlled sources, while Scope 2 emissions are indirect emissions from the generation of purchased energy. In its Purpose report, Cisco highlighted some of its achievements related to ESG. The company has made $477 million worth of contributions for community programs. In 2021, the company also met its goal to source 85% of electricity needs through renewable energy sources.
9. Verizon Communications Inc. (NYSE:VZ)
American telecom giant Verizon Communications Inc. (NYSE:VZ) is making strong progress on the ESG-related front. In 2019, it became the first US telecom company to issue a green bond. The offering raised about $1 billion in net proceeds. Verizon Communications Inc. (NYSE:VZ) has announced plans to generate renewable energy equivalent to 50% of its annual electricity consumption by 2025.
The telecom industry is one of the biggest polluters in the world. Verizon says it’s taking steps to lead from the front in solving this problem. The company claims that in 2021 alone, it recycled about 35.5 million pounds of e-waste, including 1.79 million pounds of plastic and 3.4 million pounds of lead-acid batteries. Earlier this year, Verizon Communications Inc. (NYSE:VZ) struck 15 new deals related to renewable energy. Among the companies it signed these deals with include Duke Energy, Leeward Renewable Energy and Lightsource BP.
8. NVIDIA Corporation (NASDAQ:NVDA)
GPU company NVIDIA Corporation (NASDAQ:NVDA) is fighting climate change in a unique, innovative way. The company says it’s building a digital version of our planet on which it’ll apply its AI and Omniverse technologies to predict weather changes and their effects over a span of several decades. NVIDIA Corporation (NASDAQ:NVDA) GPUs will also be used to power the Department of Energy’s supercomputer called “Kestrel” which is dedicated to advanced energy solutions.
NVIDIA Corporation (NASDAQ:NVDA) is also striving to cut its carbon emissions. In 2014, the company started asking its manufacturing suppliers to report their greenhouse gas (GHQ) emissions. In its latest Corporate Sustainability report, NVIDIA Corporation (NASDAQ:NVDA) said that its bulk carton packing operations use corrugated material that is 100% recycled fibers.
NVIDIA Corporation (NASDAQ:NVDA) has also partnered with Lockheed Martin AI Centre to solve the problem of wildfires. The companies plan to use machine learning and AI to decrease the response time to wildfires and make wildfire predictions.
7. Apple Inc. (NASDAQ:AAPL)
Apple Inc (NASDAQ:AAPL) has an ambitious goal to become carbon neutral by 2030 and the company is making significant progress towards this goal. Apple Inc (NASDAQ:AAPL) claims about 20% of the materials used in its products are made from recycled content and that it’s working to increase this figure. Last year, it announced that 175 suppliers have committed to completely shift to renewable energy.
According to Apple Inc (NASDAQ:AAPL)’s latest ESG report, the company avoided 23 million metric tons of emissions across all scopes. Apple Inc (NASDAQ:AAPL) also said it reduced its carbon footprint by 40 percent in 2021 as compared to fiscal year 2015. Apple is also trying to reduce its carbon emissions by coming up with an environment-friendly design. For example, Apple says switching to the Apple M1 chip in its 13-inch MacBook Pro reduced the product’s carbon footprint by 8%.
6. PayPal Holdings Inc. (NASDAQ:PYPL)
Payments giant PayPal Holdings Inc (NASDAQ:PYPL) announced last year that it plans to reach net-zero emissions by 2040. The company also pledged to use renewable energy to power all its data centers by 2023. PayPal has 13 data centers and 22 points of presence (POPs). Currently, about 50% of the energy used to power its data centers comes from renewable sources. PayPal Holdings Inc (NASDAQ:PYPL) is also eyeing to cut its operational greenhouse gas emissions by 25% by 2025.
PayPal Holdings Inc (NASDAQ:PYPL) is also exploring different horizons in the financial technology segment to solve the climate change problem. It funded the development of Digital Finance for Climate Resilience (DF4CR) Framework for Action which is working on developing climate resilience among financially underserved populations. The company also supports Catalyst Fund, which helps startups working to improve the livelihoods of underserved customers.
Here is what RiverPark Large Growth Fund has to say about PayPal Holdings, Inc. (NASDAQ:PYPL) in its Q3 2022 investor letter:
“PayPal, announced better-than-expected 2Q results, positive guidance (including more than $1.3 billion of 2023 cost savings leading to operating margin expansion), a $15 billion stock repurchase program, and the appointment of Blake Jorgensen as CFO, who was previously the well-regarded CFO at Electronic Arts. The company reported 9% revenue growth, in-line with guidance, and $0.93 EPS, exceeding guidance due to robust operating leverage. Management narrowed its 2022 revenue guidance from 11%-13% growth to about 11% growth due to the macro environment but raised its EPS guidance due to greater operating margin leverage and share buybacks. The stock also reacted to the news that activist investor Elliott Management had taken a stake in the company. PYPL operates at significantly lower margins than its payment competitors Visa and Mastercard, and sources suggest that Elliott intends, among other things, to push for the company to improve its margins and drive higher cash flow growth in the near term.
PayPal provides direct exposure to the secular growth in ecommerce-driven digital payments as it is the most accepted digital wallet on-line. More than 3/4 of the 1,500 largest online retailers across North America and Europe accept PayPal, which is almost triple the acceptance of Apple Pay, the number two digital wallet. PayPal is also a key beneficiary of the current dramatic shift in consumer buying habits brought on by the pandemic, as well as the relatively newer consumer-to-consumer payment trends through its Venmo peer-to-peer (P2P) payment service. With a 2Q non-GAAP operating margin of 19%, PYPL also has significant margin expansion potential given that competitors Adyen, Visa and Mastercard have 50%-65% operating margins. We believe the combination of the secular growth of eCommerce and P2P payments, along with expanding operating leverage and the strategic use of the company’s significant and growing cash balance should fuel a mid-20% earnings growth rate over the next five years. This, to us, presents an excellent risk/reward profile given that PYPL trades at a modest premium to the market multiple and a 6% 2023 FCF yield.”