The jury is still out on ESG stocks from the perspective of judging their returns. Some shares have outperformed while others have not. One reason it’s difficult to paint ESG returns in broad strokes is that it is not a distinct sector, so measuring returns is not a simple matter. Further, ESG scores are subject to their best efforts to reach objective conclusions. That makes it difficult to define what is and what is not an ESG stock, further muddling measurement.
We do know that ESG has real appeal. Investors want to feel that their capital is being directed into ‘good’ firms and that it’s being used in a positive manner overall. That said, I believe the firms below are facing an ESG reckoning that threatens their prices.
ESG Stocks: Starbucks (SBUX)
Let’s begin with the positive. Starbucks (NASDAQ:SBUX) stock simply holds a lot of appeal in general. The company reported a record $9.2 billion in revenues, with per-share earnings exceeding expectations. Additionally, the shares are underpriced relative to Wall Street’s expectations, and the company recently increased its dividend. In short, there are a number of reasons that favor it as an investment.
It isn’t financial performance that threatens the company but its environmental impact. The company uses 8,000 paper cups every minute and harvests 1.6 million trees in order to produce those cups. Only four U.S. cities accept Starbucks’ paper cups in their recycling programs.
Starbucks also creates massive amounts of plastic waste, of course. The company is making strides to address the issues. For one, it’s moving to allow reusable cups at the drive-through in its U.S. locations. Previously, that was only possible for in-store orders. Regardless, if investors decide that Starbucks isn’t doing enough, SBUX shares will suffer.
ESG stocks like 3M (NYSE:MMM) certainly have appeal to investors for purely financial reasons, especially regarding its dividend, which is currently paying a high yield. That dividend may very well be in jeopardy as the company deals with multiple lawsuit payments.
3M paid $12.5 billion to settle litigation over forever chemicals it introduced into the U.S. water supply earlier this summer. That’s about as bad as a company can do concerning the environmental leg of ESG performance. More recently, 3M agreed to pay $6 billion to settle its earplug litigation. The company has an obligation to protect Veterans, which it failed to fulfill. It’s a failure on multiple fronts, as is the PFAS fiasco.
If those two settlements prove to be the straws that break the camel’s back, that being the dividend, then MMM shares will dive. Honestly, there’s a lot to dislike about 3M’s business in general. I’m contradicting myself because I’ve supported it as an investment because of the dividend. Maybe it’s time to rethink that.
General Motors (GM)
General Motors (NYSE:GM) is embroiled in a battle against the United Auto Workers (UAW) union that will lower its shares. While the UAW has made progress in its strike against Ford (NYSE:F), it is intensifying for General Motors.
The UAW’s give-and-take strategy is paying off concerning Ford, where it has made progress. As a result, the UAW is limiting its strike to a single Ford plant. However, it isn’t doing the same for General Motors or Stellantis (NYSE:STLA).
Instead, the UAW is upping the ante and has expanded the strikes to 38 additional parts distributors for the two firms. The strikes are disrupting operations and will result in lost profits. GM has recently improved, with revenues and earnings figures improving substantially in Q2. The increases prompted the firm to raise full-year guidance, which will have to be adjusted due to the strikes. Further, GM will likely have to concede to UAW demands that will increase costs overall and negatively affect its forecasts. Thus, this is one of the top ESG stocks to sell right now, in my opinion.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.