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Microsoft Is Best ESG Company, Checks Boxes For Environmental, Social, Governance

(Investors Business Daily) – For investors focused on environmental, social and governance issues, software giant Microsoft(MSFT) should be on their radar screens. Microsoft stock has performed well as the company devotes increasing attention to matters of interest to those who favor ESG investing.

Redmond, Wash.-based Microsoft ranks first out of 2,360 public companies based on Dow Jones ESG data when coupled with IBD Composite Ratings. Companies needed Composite Ratings of at least 85 to make the list.

Microsoft led the list with a Dow Jones ESG score of 76.3. Dow Jones ranks companies for their performance in 26 environmental, social and governance categories, and it follows the framework of the Sustainability Accounting Standards Board.

The software giant has its highest rankings in energy management, systemic risk management, and employee engagement in diversity and inclusion.

Those positives were modestly offset by Microsoft’s weaknesses in ESG rankings. Those weaknesses are in labor practices, business ethics, and product quality and safety.

Microsoft Stock Has High Composite Rating

From a pure investment standpoint, Microsoft stock has an IBD Composite Rating of 98 out of 99, as of Oct. 25. IBD’s Composite Rating is a blend of key fundamental and technical metrics to help investors gauge a stock’s strengths. The best growth stocks have a Composite Rating of 90 or better, according to IBD trading guidelines.

The company declined to comment for this article. But in Microsoft’s 2020 Corporate Social Responsibility Report, Chief Executive Satya Nadella addressed the company’s responsibilities to the world. He identified Microsoft’s four key commitments.

They include supporting inclusive economic opportunity, protecting fundamental rights, committing to a sustainable future, and earning trust.

“As a company, we are steadfast in our mission to empower every person and every organization on the planet to achieve more,” Nadella said. “As we pursue our mission, we also recognize our enormous responsibility to ensure the technology we build benefits everyone on the planet, including the planet itself. We must always use technology to help address the world’s challenges, not create new ones.”

Microsoft Steps Up For Social Causes

Microsoft offered some proof points for its ESG initiatives in its report. Here are a few of its social programs:

  • In its fiscal 2020, Microsoft provided $1.9 billion in donated or discounted products and services to help 243,000 nonprofits globally better serve their communities.
  • Also, in the three years since launching its Microsoft Airband Initiative, the program has helped provide access to broadband internet to 2.1 million people in the U.S. who live in previously unserved rural areas. Outside of the U.S., the Microsoft initiative has provided connectivity for 15.1 million people living in rural areas.
  • In addition, Microsoft launched a Global Skills Initiative with a goal of reaching 25 million learners by early 2021.
  • Plus, Microsoft’s Disability Answer Desk has answered more than a million requests for technical support for people with disabilities and seen a 200% growth in calls since the start of the Covid-19 pandemic.

Microsoft also outlined its progress on environmental initiatives.

In January 2020, Microsoft pledged to become carbon negative by 2030. And by 2050, it expects to have removed from the environment all the carbon the company has emitted directly or by electrical consumption since its founding in 1975.

Microsoft also is seeking to replenish more water than it uses and protect more land than it uses.

Reducing Carbon Footprint A Key Effort

ESG initiatives don’t help the top and bottom lines for companies like Microsoft. But they do provide a positive message that bolsters the corporate brand, and that is a plus for Microsoft stock.

“Reducing its carbon footprint has been a core mantra at Microsoft over the last five years or so,” Wedbush Securities analyst Daniel Ives told IBD. “It’s now becoming more front and center for investors, especially on ESG plays.”

As Microsoft expands its cloud computing business, its environmental impact is becoming more of an issue, he said. Cloud data centers are big consumers of electricity.

Biggest ESG Investing Risk

Microsoft’s highest risk in ESG investing is related to data privacy and security risks, said Jennifer Vieno, manager of technology, media and telecommunications research at ESG analysis firm Sustainalytics.

“Of the ESG risks, it is the most material for Microsoft,” she told IBD. Cybersecurity breaches can erode trust in the company’s business practices, Vieno said.

Sustainalytics, a Morningstar company, measures ESG risk to a company’s enterprise value.

Microsoft gets a Sustainalytics rating of 13.3, which is in the low-risk category. That’s down from 14.9 last year. The lower the score, the less risky a company is in ESG investing.

Microsoft Stock Breaks Out

On Oct. 18, Microsoft stock broke out of a flat base with a buy point of 305.94, according to IBD MarketSmith charts. It ended the regular trading session on Oct. 22 at 309.16.

Also, Microsoft stock ranks first out of eight stocks in IBD’s Computer Software-Desktop industry group, according to IBD Stock Checkup.

Microsoft stock is on IBD’s prestigious Leaderboard list, plus it also is in the IBD Long-Term Leaders Portfolio.

Investors see Microsoft stock as a “Rock of Gibraltar name in tech,” Wedbush’s Ives said.

In recent years, Microsoft has been driving hard into cloud computing. Its cloud offerings include Azure infrastructure software as well as Office 356 productivity software and Dynamics enterprise software. The company also owns LinkedIn, Skype and GitHub.

“The cloud momentum is not slowing down at Microsoft,” Ives said. “And to some extent it’s actually accelerating.”

The digital transformation of businesses is only a third of the way completed, he said.

“About 35% have moved to the cloud and we think there’s $2 trillion in spending up for grabs over the next decade,” Ives said. “And Microsoft is gaining incremental share from the likes of AWS (Amazon (AMZN) Web Services) and others in this cloud arms race.”

Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.

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