Investing in Virtue to Beat the Market: Whole Foods Market, Inc. (WFM), Google Inc (GOOG)

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Can investors put cash into virtue and still generate great returns? As it turns out, it’s getting easier to do exactly this all the time. More companies are doing good things in the world, and more investors are waking up to the positive opportunities for their portfolios and beyond.

Sorry, tobacco, alcohol, banks, energy, genetic modifiers, and other entrenched socially and environmentally damaging companies. Increasing numbers of corporations have either started out as good guys or are transforming themselves into better corporate citizens. Meanwhile, responsible investments are becoming more popular because they’re actually good investments.

Whole Foods Market, Inc. (NASDAQ:WFM)Putting the pieces together
GMI Ratings recently covered what it dubbed an overdue alignment of ESG (environmental, social, and governance concerns) with CSR (corporate social responsibility). Although there has been plenty of research recently showing that responsible investments do well over the long haul, there’s more evidence that investors should demand integration of such concerns into corporate strategies. This would be for the good of the world and investors’ own safe and profitable investments.

The author of the post, James Kaplan, pointed to a United Nations “Integrated Analysis” report from the Principles for Responsible Investment. It illustrated the numbers of major investors who are actually already using ESG factors to crunch data for their growth estimates and discount rates.

In the foreword to the report, Neil Brown, Chairman of the PRI’s ESG Integration Working Group, said, “I believe the analysis presented here attempts to deliver all three [ESG] and sits at the cutting edge of investment practice in 2013.”

Case studies in the report collected data from major investors like UBS AG (USA) (NYSE:UBS), Citigroup Inc. (NYSE:C), and Societe Generale. Analysts at these and other Wall Street firms are increasingly using ESG elements to drive their valuation and growth projections. By doing so, they’re taking into account the impact these elements have not only on earnings and cash flow but also broader on macroeconomic issues like resource scarcity.

In addition, Deloitte Review‘s “Finding the Value in ESG Performance” found that environmental news has increasingly had a direct impact on stock prices. Positive news on average increased stock returns by 0.84%. Screening out poor corporate citizens, long thought by some investors to be a common-sense move, is increasingly acknowledged as a risk-reduction strategy.

There’s more. Last year, a study from Harvard Business Review tracked 18 companies over 18 years. High-sustainability companies beat low-sustainability companies by a long shot over the long haul in terms of share price, as reported by Bloomberg here.

Acknowledging important intangible assets
As much as I have criticized companies that I argued were repositories of vice, there are plenty more positive companies investors can put on their watchlists. Here are a few.

Google Inc (NASDAQ:GOOG)
Google’s founders have built a foundation of responsible factors, such as vows to reduce carbon impact and continued investments in clean energy, excellent treatment of its employees, the democratization of information, and efforts to tackle some of the world’s biggest social problems. Its stock’s recent flirtation with the magical $800 mark shows that investors aren’t exactly suffering from the company’s philanthropic edge.

Whole Foods Market, Inc. (NASDAQ:WFM)
Organic supermarket Whole Foods Market has also been built with stakeholder-friendly initiatives and health-focused innovations. This is a company that’s dead set on doing more good in the world than harm. Overdone pessimism regarding its most recent quarter has presented a buying opportunity, given continued strong sales figures and its caring, innovative base business.

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