5 small-cap stocks that are unique to sustainable investing funds

January 07, 2025 at 11:45 AM EST

Navigating the large universe of small-cap stocks can be a daunting task, which is why most investors leave the stock picking to professional fund managers when it comes to the category. And finding sustainable investing choices among those stocks can be even tougher.

Investors looking for hidden gems in small caps that can give them exposure to carbon-transition or other sustainability themes should take a look at a recent Morningstar analysis of sustainable small-cap stocks and stock funds.

“Many times, the difference between sustainable and traditional funds can be minor. Both types of funds hold stocks that limit risk, have room to grow, and are expected to perform well. Environmental, social, and governance-focused funds can follow a wide range of approaches, but in practice, many own the same stocks as conventional funds, though to different degrees,” wrote Frances Aufderheide, a member of the Morningstar Development Program as a financial product specialist.

In looking for stocks that are unique to sustainable funds in the small-cap space, Morningstar looked to companies with market capitalizations of $2.9 billion to $11.2 billion. Analysts then compiled the holdings of the oldest share classes of all U.S. sustainable small-cap funds and created a theoretical portfolio of the top 200 stocks that are commonly owned by the group.

After repeating the exercise for traditional small-cap funds, Morningstar was able to produce a list of five stocks that were held exclusively in the sustainable funds.

Here is Morningstar’s description of each stock, with commentary from Morningstar analysts and its Sustainalytics division:

Aptar Group

Morningstar ESG Risk Rating Assessment: Negligible
Total Return Year-to-Date (Month-End): 41.30
Price/Fair Value: 1.05
Moat: Narrow

“Aptar ATR is a global leader in dispensing technologies and operates under three business segments, Aptar Pharma, Aptar Beauty, and Aptar Closures. The company specializes in various drug dispensing solutions including nasal spray inhalers and elastomer components for injectable drugs, high-end fragrance pumps, and food dispensing closures,” wrote Jay Lee, Morningstar senior equity analyst.

“We think the firm’s outlook is strong from a longer-term perspective, with tailwinds from strong pharmaceutical end market growth and potential for share gains in newer markets such as active packaging.”

From Morningstar Sustainalytics: “To maintain its ongoing operations, the company uses large quantities of water. As water resources are becoming increasingly constrained, especially in drought prone areas, companies may face limited fresh water availability, higher water prices or even regulatory restrictions on water use. There is increasing customer demand for more environmentally or socially responsible products and services. The company’s carbon footprint is affected by the nature of its operations and the source of energy used to power these operations.”

Wyndham Hotels & Resorts

Morningstar ESG Risk Rating Assessment: Medium
Total Return Year-to-Date (Month-End): 23.52
Price/Fair Value: 1.05
Moat: Narrow

“We believe Wyndham’s WH moat is illustrated by its enduring unit growth demand from third-party owners, guest satisfaction ranking of its brands, room and loyalty scale, and contract length of franchisee relationships,” wrote Dan Wasiolek, Morningstar senior equity analyst.

“The company’s overall ESG risk exposure is medium and is similar to subindustry average. Product governance, resource use and carbon-own operations are notable material ESG issues.”

From Morningstar Sustainalytics: “To maintain its ongoing operations, the company uses large quantities of water. Increasingly stringent carbon regulations and energy efficiency requirements could lead to higher energy prices, larger associated costs for the company and compliance issues.”

Clearway Energy

Morningstar ESG Risk Rating Assessment: Severe
Total Return Year-to-Date (Month-End): 12.00

From Morningstar Sustainalytics: “Clearway Energy Inc. CWEN is a publicly-traded energy infrastructure investor with a focus on investments in clean energy and owner of modern, sustainable and long-term contracted assets across North America.”

5 small-cap stocks that are unique to sustainable investing funds — Clearway Energy photo

“The company’s operations release negative environmental externalities such as air pollutants, hazardous substances or wastewater. While the company’s operations may contribute to local communities by creating job opportunities, they can also negatively impact the livelihoods of people in these communities.”

“Although the company provides some ESG disclosure, its overall ESG reporting is not in accordance with leading reporting standards. However, it has assigned board level responsibility for overseeing ESG issues.”

Commerce Bancshares

Morningstar ESG Risk Rating Assessment: Medium
Total Return Year-to-Date (Month-End): 39.60
Moat: Narrow

“Commerce Bancshares Inc., CBSH is a $22 billion regional bank that provides a diversified line of financial services, including business and personal banking, wealth management, financial planning, and investments through its affiliated companies,” Morningstar Sustainalytics says. “The company’s product and service portfolio, as well as its customer base triggers exposure to quality and safety issues.”

Darling Ingredients

Morningstar ESG Risk Rating Assessment: Low
Total Return Year-to-Date (Month-End): (18.68)

From Morningstar Sustainalytics: “Darling Ingredients Inc. DAR develops and manufactures sustainable ingredients for customers in the pharmaceutical, food, pet food, fuel, and fertilizer industries. It collects and transforms all aspects of animal by-product streams into ingredients, including gelatin, fats, proteins, pet food ingredients, fertilizers.”

“Darling’s production, processing and transfer facilities require large amounts of energy, contributing to a notable carbon footprint.”

“In addition, growing consumer demand for healthier and more environmentally friendly foods, including low-fat and plant-based proteins, exposes Darling to potential customer loss should it fail to adapt its portfolio to this trend.”

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