There is no better proof of the mainstreaming of sustainable investments than the fact that they now account for more than a third of global assets. ESG inflows skyrocketed to a record US$37.8 trillion by the end of 2021 and are forecast to reach US$53 trillion by 2025.
This monumental rise of ESG investing reflects a swelling tide of investor interest driven by stronger correlation between healthy investment returns and sustainable outcomes. It also shows company profitability has never been more closely tied to a commitment to sustainability.
The following stocks are constituents of the Morningstar US Sustainability Index and score high on ESG parameters. These wide-moat companies have differentiated businesses and competitive advantages that help them remain dominant in their respective markets and negotiate economic uncertainties with relative ease.
Leading global IT-services firm, Accenture (ACN) provides consulting, strategy, and technology and operational services across more than 50 countries. These services range from aiding enterprises with digital transformation to procurement services and software system integration. The company serves a variety of sectors including communications, media and technology, financial services, health and public services, consumer products, and resources.
Accenture boasts an enviable ESG risk score of 9.7, as of March 22, rated by Morningstar-owned ESG research firm Sustainalytics. The ESG risk score is a metric that represents a company’s exposure to material ESG issues. The lower the ESG risk score, the better.
“Accenture’s growth will remain at a healthy and gradual pace, rather than experience a massive uptick,” says a Morningstar equity report, adding that the company's prominent reputation and proven ability to bring expertise to a gamut of enterprise issues will help Accenture maintain its wide economic moat.
As a consultant, Accenture provides solutions for specific enterprise problems for more than 75% of the global top 500 companies.
“There is always something new in the realm of enterprise technology to keep Accenture relevant and engaged with its most important customers,” says Morningstar equity analyst Julie Bhusal Sharma, who appraises the stock to be worth US$258, and projects a five-year compound annual revenue growth rate of 9%.
Accenture’s wide moat, or sustainable competitive advantage, stems from intangible assets, largely derived from its reputation and expertise. It also benefits from switching costs, since “familiarity makes it hard to risk changing consultant or IT outsourcing providers,” notes Sharma.
The leading provider of credit ratings, Moody's (MCO) provides ratings on fixed-income securities. Moody’s Investors Service represents a majority of the firm’s revenue and profits. Its other segment, Moody’s Analytics, comprises Research, Data, and Analytics (RD&A) and Enterprise Risk Solutions. RD&A’s products include credit research, quantitative credit scores, economic research, business intelligence, among others.
The New York-based company has an ESG risk score of 10.6, as of Mar 22, rated by Sustainalytics.
“Given the embedded nature of credit ratings among capital markets participants, regulators, and index providers, Moody’s enjoys a strong competitive position and strong operating margin,” says a Morningstar equity report.
Bond issuance volumes are a critical driver for Moody’s ratings business, known as Moody’s Investors Service (MIS). The segments accounts for about three quarters of the firm’s adjusted operating income. “Over the long term, that mid-single-digit revenue growth, driven by GDP and pricing, is a reasonable expectation for MIS,” notes Morningstar equity analyst Rajiv Bhatia, who recently raised the stock’s fair value from US$345 to US$375.
Moody’s Analytics (MA) has been a key source of growth both through organic investments and acquisitions. The segment currently makes up over 40% of the firm’s revenue. “The subscription revenue model and high retention rates help offset some of the volatility in the ratings business,” says Bhatia.
Moody’s wide moat is based on intangible assets and network effects in its ratings business. Bond issuers value credit ratings from Moody’s “because of their wide acceptance among asset owners and asset managers,” asserts Bhatia.
The world's largest home improvement specialty retailer, Home Depot (HD) operates more than 2,300 warehouse-format stores across the U.S., Canada, and Mexico. The company is on track to deliver a whopping US$153 billion in revenue in 2022. Its stores offer numerous building materials, home improvement products, lawn and garden products, decor products, and services around these offerings.
The Atlanta-based retailer notched an ESG risk score of 11.4, as of Mar. 22, rated by Sustainalytics.
Home Depot continues to benefit from a healthy level of housing turnover along with perpetual improvements in its merchandising and distribution network. “While Home Depot has produced strong historical returns as a result of its scale, operational excellence and concise merchandising remain key tenets underlying our modest margin expansion forecast,” says a Morningstar equity report.
Home Depot should continue to capture top-line growth beyond 2022, “bolstered by aging housing stock and rising home prices,” says Morningstar equity analyst, Jaime M. Katz.
Other internal catalysts for top-line growth could come from the firm’s efficient supply chain, improved merchandising technology, and penetration of adjacent customer product segments, she adds.
The firm’s wide economic moat is underpinned by its economies of scale and brand equity. “The familiarity of the brand and knowledge of the employee base keep the business in the forefront of consumers' minds as the premier choice for home improvement needs,” says Katz, who recently lifted the stock’s fair value from US$244 to US$255, prompted by better-than-expected fourth-quarter results.
