Editor's Note: A previous version of this article appeared on Aug. 11, 2022.
A previous version of this article appeared on Aug. 11, 2022.
Companies with wide moats are difficult to compete with. And this advantage is especially appealing when paired with solid management of environmental, social, and governance risk.
In other words, durability and sustainability, also called ESG, are natural partners. ESG keeps a close eye on long-term risks that aren’t articulated by traditional finance.
All companies face some sustainability risk, not least because of the industries in which they operate. For example, an oil and gas company will be highly exposed to potential environmental problems, while a consumer technology business will be exposed to social risks like data privacy violations.
Indeed, Morningstar research finds that the biggest ESG risk is in energy and utilities, with the smallest in technology and real estate.
A company’s approach to sustainability demonstrates how it anticipates and addresses these long-term risks. Companies that mishandle ESG issues could incur significant economic costs that jeopardize their ability to earn long-term, maintainable profits.
Morningstar Sustainalytics measures this with the Sustainalytics ESG Risk Rating. It considers two main factors—exposure, or a company’s vulnerability to ESG risk, and management, which describes actions taken by a company to manage a particular ESG issue—and blends them into a single score. The lower the number, the lower the risk.
In the table below, we refined our Best Companies to Own in 2023 list to highlight the ones with Morningstar ESG Risk Rating Assessments of Negligible or Low. This rating is based on the ESG Risk Rating.
We didn’t include valuations for these companies. Rather, we focused on the criteria that set a company up for success in the long term. So, while not all of these names can be considered a buy today, this can serve as a great watchlist.
Here are the 50 companies that made the cut, ranked by the risk score.
You can explore the ESG Risk Rating score of each company under Morningstar coverage in the Sustainability tab of its stock quote page on Morningstar.com.
Keysight Technologies KEYS
Keysight Technologies is the leader in communications testing and measurement solutions. We think it has the strongest and broadest communications testing capabilities in the market across hardware, software, and services. Its wide Morningstar Economic Moat Rating, according to analyst William Kerwin, is owing to “intangible assets in the design of test and measurement equipment and software and switching costs for its portfolio of solutions.”
Because of Keysight’s strong ESG reporting and oversight of ESG issues, Sustainalytics gives the company an ESG Risk Management rating of Strong. Sustainalytics notes that the firm has implemented a strong whistleblower program, has an adequate policy governing environmental issues, and employs solid social supply chain standards.
Keysight’s greatest material ESG issue is the risk of losing human capital to competitors, but we don’t think this is likely to happen, and we think the firm’s strong variable compensation program helps retain talent.
The only recent controversy attributed to Keysight is an investigation into alleged patent infringement practices. Still, this incident had minimal impact on Sustainalytics’ broader analysis of the firm’s ESG practices.
Consulting firm Accenture’s risk is mainly related to its exposure to cyberattacks and its dependency on specialized talent, such as IT consultants and engineers, as it tries to keep up with client demand.
Clearly, Accenture is taking sustainability considerations seriously. Accenture CEO Julie Sweet noted during a quarterly call that sustainability “is a critical area for which technology is still evolving. … We believe that every business must be a sustainable business, and yet companies are at very early stages of figuring out how to make this shift.”
Morningstar analyst Julie Bhusal Sharma is a fan, citing Accenture’s strong reputation for reliability and its “treasure trove of institutionalized industry expertise and experience.” Accenture’s technological and strategic know-how, paired with its attention to sustainability considerations, is helping bolster profits. Accenture’s operating margin for the second quarter of fiscal year 2023 was 12.3% and though a slight decline from 13.7% a year ago, this still marks a steady expansion over the previous decade.
Moody’s, along with S&P ratings, is the market leader in providing credit ratings on fixed-income securities. The company earns a wide moat rating because of its intangible assets and the network effects in its rating business. In regard to its network effect, Morningstar analyst Rajiv Bhatia says that “credit ratings provide value to bond issuers as well as bond investors. … Bond issuers value credit ratings from Moody’s and S&P because of their wide acceptance among asset owners and asset managers.”
Moody’s management of material ESG issues also nets a ESG Risk Management assessment of Strong from Sustainalytics. Moody’s has strong management of its human capital and ethical and cybersecurity risks, according to Sustainalytics. Some of its strengths are offset by limited disclosure on gender pay, third-party data policies, and lack of disclosure on the nature, volume, or resolution of whistleblower reports received.
One controversy around business ethics did reach the level of “moderate.” In March 2021, the European Securities and Markets Authority issued a EUR 3.7 million (USD 4.3 million) fine against five Moody’s Investors Service branches over allegations that they negligently breached conflict-of-interest regulations.
Sustainable Companies Can Still Have Controversies
Clearly, a spot on this list doesn’t mean that a company’s sustainability efforts are flawless.
For example, though Sustainalytics has assigned Experian EXPGY an overall ESG Risk Rating of Low, multiple data security incidents in both the U.S. and in Experian's international subsidiaries have resulted in a Controversy Assessment of Significant. The frequency of these incidents has contributed to operational and reputational risk, as shareholders and customers may lose confidence in the company's management.
Even so, Experian holds a spot in our catalog of sustainable companies because it is on the right track to improve data privacy and cybersecurity programs. The firm has started reporting according to the Sustainability Accounting Standards Board standards, which is a best practice, and has improved its quality management system to ensure secure data management. It also has Negligible risk ratings in the areas of Business Ethics and Product Governance.
Sustainable Companies Will Continue to Be Sustainable
Remember, this list is about long-term sustainability—not valuations. For guidance in that area, you can look to the Morningstar US Sustainability Moat Focus Index.
From that perspective, not all the names on this catalog of low-ESG-risk companies with wide moat ratings can be considered a buy at the moment. Still, for investors interested in managing long-term ESG risks, they’re worth keeping a close eye on.
A previous version of this article appeared on Dec. 14, 2022.
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