FTSE 100 – the 5 highest ESG rated companies

Environmental, Social and Governance (ESG) ratings have become more popular over the past few years.

The ratings evaluate more than just how ‘green’ a company is though. Social issues, like equality and human rights, and how a company’s run (think executive pay packages and employee incentives) also count. Focusing on these areas makes good business sense too – it’s not all about conscience.

And as ESG issues gain prominence, it’s going to become more expensive to be a polluting company. Higher taxes and fines are just a couple of ways this happens.

That’s why companies in less traditionally ethical sectors can have strong ESG credentials. Those criticised for having a negative social or environmental impact are being encouraged to clean up their acts.

We’ve looked at the five most highly ESG rated companies in the FTSE 100, according to Refinitiv data. The results might surprise you. It just goes to show that those wanting to invest with ESG in mind, don’t necessarily have to exclude any one type of investment.

Investing in individual companies isn’t right for everyone. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

Our guide to ESG investing

This article isn’t personal advice. If you’re not sure if an investment is right for you, seek advice. All investments can rise and fall in value, so you could get back less than you invest. Yields are variable, not guaranteed nor are they a reliable indication of future income.

1. AstraZeneca (AZN)

Big-pharma isn’t the first place you’d expect to find a socially conscious company. But AZN’s focus on ESG has been apparent throughout the pandemic.

AZN has committed to selling its vaccine at-cost until at least June. That’s $4 per dose compared to Moderna’s $37 and Pfizer’s $20. That puts AstraZeneca at the centre of the push to vaccinate globally – not just in wealthy regions like Europe and the US.

From an ESG standpoint, that’s fantastic. But if it’s profits you’re looking for, that doesn’t exactly sound like a winning strategy.

But AZN has other things in the pipeline that make it interesting outside the ESG angle. The group’s set to acquire Alexion, which should bring a variety of profitable rare-disease treatments into Astra’s massive distribution network.

The deal will increase how much AstraZeneca’s currently borrowing. But over time it should help the group make more money, offsetting some of the debt burden.

AZN’s 2.9% prospective dividend yield is nothing to scoff at, either. And if the Alexion deal completes without issue, we could see that figure rise in the years to come. Though, it’s important to keep in mind that no dividend is guaranteed.

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2. GlaxoSmithKline (GSK)

Another of big-pharma’s heavy hitters, GlaxoSmithKline, has one of the highest ESG scores in the FTSE 100. Providing access to necessary treatments is a problem outside the coronavirus vaccine bubble as well, and Glaxo has proven to be a leader in this area.

Of the world’s drug makers, GSK is ranked highest in the Access to Medicine Index. The index measures pharmaceutical companies’ efforts to make treatments and therapies available to vulnerable populations, like those that can’t afford them. It takes into account whether drug makers put access plans into place during each phase of a treatment’s development.

On top of that, GSK aims to have a net zero impact on climate and a net positive impact on nature by 2030.

Outside of its ESG-appeal, Glaxo’s biggest draw among investors is likely its 6.4% prospective dividend yield. Outside of that, the case for GSK isn’t very clear.

The company is going through something of an identity crisis, with the plans in place to split into two separate companies – one housing the Consumer Healthcare business and another taking on BioPharma assets. That means the GSK stock bought today could represent something totally different in a year.

Adding to the murky future outlook is a mix of temporary and long-term headwinds. Lots of the headwinds, like weak demand for non-coronavirus vaccines and therapies, were due to the pandemic. But other factors – like patents expiring on some of its biggest cash cows – will continue to drag on beyond lockdowns.

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3. British American Tobacco (BATS)

It might raise a few eyebrows to see a tobacco company at number three in the list. But the company’s focus on its impact on the environment, along with human rights issues for its farmers has helped them score well.

The group’s been working toward its goal of making its direct operations carbon neutral by 2030 by upgrading its factories with more efficient equipment and upping the use of renewable energy. BATS has also been cutting back its water usage and waste by focusing on recycling.

Socially, British American Tobacco set up a global ‘Thrive’ programme, which focuses on sustainable agriculture and improving the livelihood of the 90,000+ farmers it employs. The programme looks to support BATS’ network of farmers by offering a variety of training and materials to improve production. The programme also works to prevent issues like child labour and human rights violations.

This doesn’t fully offset the fact a bad reputation is also bad for business. How much tobacco we want is on a downslope. BATS is faced with the uphill battle of assuming demand will fall every year. That’s led the group to explore the e-cigarette market. But this is still a small part of the whole, and a bushel of new regulatory pressures is likely to accompany its growth.

British American Tobacco’s dividend is one of its biggest draws. An 8.7% yield is attractive, but also a result of last year’s faltering share price.

For now, the group has enough cash to comfortably cover dividend payments. Management will be keen to keep its 20-year dividend record intact too. But dividends aren’t guaranteed – especially in the current environment, and yields aren’t a reliable indicator of future income.

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4. Glencore (GLEN)

Like BATS, mining giant Glencore’s focus on finding ways to offset its negative aspects has landed it high up the list.

According to Refinitiv, Glencore scored highly in both the governance and environmental pillars. Governance relates to things like transparent executive pay schemes and incentivising long-term success. The environmental pillar is more complicated.

The answer can be found within Glencore’s sustainability framework. It aims to make sure reducing the group’s environmental impact is a key part of its overarching strategy.

Compensation based on how sustainable the group is, isn’t included in upper-level manager’s renumeration policies. This is to help keep their goals in line with shareholders’. On the other hand, lower-level managers’ day-to-day jobs are more ESG focused. The group believes this can balance shareholder responsibilities with environmental ones.

Glencore’s planning to reduce its total emissions by 40% by 2035 and ultimately, achieve net zero total emissions by 2050. It hopes to reach these targets by reducing coal production and shifting focus toward its metals portfolio, which supports the development of electric vehicles.

Glencore’s performance is, unsurprisingly, tied to commodity prices. When the economy is booming and people are building things, they have tended to rise and vice-versa. That’s evident when you look at Glencore’s 2020 results – lower commodity prices during the onset of the pandemic contributed to the group’s $1.9bn full-year loss.

If the global economy experiences a post-virus boom, Glencore shares could benefit. But investors should be cautious as any recovery in the economy is far from certain at this point.

The group’s valuation reflects this uncertainty – its price-to-earnings (P/E) ratio of 12.2 is marginally below its 10-year average. Glencore also offers a forecast dividend yield just shy of 4%. But net debt (readily available assets minus debt) of $27.7bn is a red flag as it could eventually put pressure on the group being able to continue paying its dividend.

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5. Coca Cola HBC (CCH)

Coca Cola HBC is not the popular beverage-maker you might be thinking of. Instead it’s the Switzerland-based bottler of Coca-Cola products.

Of the five companies on this list, CCH seems to be the most well-rounded when it comes to ESG scoring. While the other four come with some social or environmental baggage, CCH scored highly in all three major ESG pillars.

The bottler is a big part of its parent company’s ‘World Without Waste’ initiative, which aims to make 100% of the firm’s packaging recyclable by 2025.

For its part, CCH has been working to use more recycled plastic in the creation of Coca-Cola packaging. By 2025 it plans to be using 50% recycled PET (the type of plastic it uses for packaging) in its European operations and 30% across the company as a whole.

CCH is also helping in the development of recycling collection systems across lots of places it operates in. The group’s also investing in bringing some of the PET recycling technology in-house, which it thinks will reduce energy consumption for this process by 40%.

The bottler was hit hard by the pandemic, but a strong second half helped reduce some of those issues. CCH finished the year with free cash flow up 12.3%, suggesting its 2.5% projected dividend yield is relatively well-supported although remember it is not guaranteed.

For now, the group’s P/E of 18.8 is below its 10-year average, suggesting investors are hesitant after heavy full-year revenue losses. But as the economy picks back up and lockdowns ease, the company could see its top line start to rise again.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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