The Top Stocks Widely Owned by ESG Funds

Sustainable and traditional large-cap portfolios are frequently similar, holding many of the same companies. But looking at the stocks owned uniquely by sustainable funds—those that use environmental, social, and governance criteria—can offer investment ideas for sustainable investors.

While there are a lot of similarities, what stocks are unique to sustainable funds? We looked at a breadth of large-cap funds, which primarily invest in companies with substantial market capitalizations, and found stocks that are common to both sustainable and traditional funds and those exclusively owned by ESG funds. The top five unique stocks are Intel W. W. Grainger  Baker Hughes American Water Works Company and Xylem

Our Methodology

Big-picture goals are the same for both conventional and sustainable funds, whose managers aim to invest in stocks that perform well against their benchmark and mitigate risk. ESG funds add a sustainable lens, focusing on limiting ESG risk, seeking ESG opportunities, or targeting specific themes.

We compiled the holdings of the oldest share classes of all US sustainable large-cap funds. We put the top 200 stocks that are commonly owned in a theoretical portfolio. We calculated what the average weight of each security would be if this portfolio held all 200 stocks. We did the same with traditional funds, defining the universe as the oldest share class of large-cap funds, excluding sustainable funds.

By doing so, we can find stocks overweight and unique to sustainable funds in the large-cap universe. In this case, “overweight” stocks are those that hold a greater weighting in sustainable funds compared with traditional ones. Securities that are held in sustainable funds, but not conventional ones, are considered “unique.”

Stocks Unique to ESG Funds

We found five stocks owned exclusively by large-cap sustainable funds in the technology, industrials, industrials, energy, and utilities sectors. We describe them below, with insight from Morningstar analysts.

Intel 

“Intel is in a difficult financial position, in our view, based on the company’s recent inability to generate free cash flow and its aspirations for hefty capital investments into its next wave of chip manufacturing across the globe. As of December 2024, Intel held $22.1 billion of cash and investments, as compared with $50 billion of debt. Intel was regularly earning $10 billion-plus of free cash flow per year in its heyday but burned free cash flow in each year from 2022 to 2024. Financial contributions from partners will be needed to prevent further free cash flow burn in 2025.

In response, Intel eliminated its dividend and is also shedding noncore businesses. Further, Intel expects to be in a hefty investment phase, even net of any government incentives it may receive to set up shop in various countries around the world.”

- Analyst: Brian Colello, CPA

W.W. Grainger

“Grainger stands on strong financial footing. Its net debt/EBITDA ratio hovers around 1.0 times, considerably below the industrial average and that of many distributor peers. We believe the company has room to increase leverage if needed, but management looks to be committed to keeping its net leverage ratio around 1.0. The company’s loans are from a diverse base of lenders and have reasonable interest rates and dispersed maturities.”

- Analyst: Nicholas Lieb, CFA

Baker Hughes 

“We believe Baker Hughes enjoys high credit quality, with a low risk of default. As of the end of 2024, Baker Hughes carries long-term debt of $6 billion versus cash and equivalents of $3.4 billion.

Baker Hughes’ adjusted net leverage ratio sits at 0.6 times at year-end 2024, and we expect it can maintain a ratio under 1 through the economic cycle. Baker Hughes also generates decent free cash flow margin, which came in north of 7% in 2024, and it successfully converted over 64% of its adjusted EBITDA into free cash flow. We expect it can improve upon this free cash flow to between 10% and 11% through the cycle, while still maintaining a similar conversion ratio.”

- Analyst: Joshua Aguilar

American Water Works Company 

“We assign American Water Works a narrow moat rating. Utility regulation in the U.S. recognizes the need for capital providers--lenders and shareholders--to earn a return on their investments while ensuring that utilities do not take advantage of their service area monopolies by gouging customers.

We have confidence that American Water Works’ returns on invested capital will remain at a healthy spread over its cost of capital for the foreseeable future. American Water Works owns a difficult-to-replicate network of water utilities that meet essential needs for customers.”

- Analyst: Andrew Bischof, CFA

Xylem 

“We think Xylem has carved a narrow moat due to customer switching costs and intangible assets. Xylem’s large installed base of equipment generates recurring revenue driven by aftermarket service and replacement parts in the water infrastructure segment, replacement parts in the applied water segment, and long-term contracts (up to 15-20 years) in the measurement and control solutions segment. The company’s moat is bolstered by intangible assets, including an extensive patent portfolio, reputable brands, and strong dealer relationships.”

- Analyst: Krzysztof Smalec, CFA

Above, we highlight the top widely held stocks between sustainable and traditional funds. Their weights in our hypothetical portfolio represent the average weights across each universe.

Many stocks are widely held in both sustainable and traditional funds, but a handful hold significantly more weight in sustainable portfolios. Trane Technologies TT, manufacturer of HVAC systems, and Ecolab ECL, make the list.

This story was originally published on November 18, 2024, and has been updated.