Rising inflation can be a "big problem" for sustainable investors, according to Bernstein, which named the best stocks to ride out this trend. The bank said that inflation, and the potential for higher inflation, reflect "the single most important narrative" driving markets and investor concerns this year. It's already impacted environmental, social and governance (ESG) stocks in a big way. Clean energy stocks are down roughly 20% this year on an absolute basis, while energy, commodities, defense and tobacco stocks have all outperformed. This sharp contrast comes despite flows into ESG funds continuing at a record pace. Rising prices will likely continue to pose a significant challenge for ESG funds in particular, Bernstein said, but added that there are a number of ways for these investors to lower their risk exposure. In a note published June 10, Bernstein screened for ESG stocks in the U.S., Europe and Asia that are best positioned for rising inflation. Bernstein screened for the stocks by considering three ways that sustainable investors could brace for a rising inflationary environment: 1. Seeking out high-scoring ESG stocks that are positively exposed to rising bond yields. 2. Investing in high-scoring ESG stocks which have robust pricing power. 3. Identifying companies that have increased exposure to the energy, commodities and financials sectors. In considering stocks that should be in an ESG portfolio, Bernstein recognized that investors may struggle to prioritize so-called "sin" stocks, such as energy and commodity companies, although these "value" stocks usually perform well when inflation and bond yields rise. Value stocks are seen as being underappreciated by the market. Bernstein also highlighted that financials tend to be left on the sidelines by ESG investors, since measuring their environmental credentials can be tricky. U.S. The analysts said that U.S. ESG funds are "not that well positioned" for inflation because they tend to be underweight on so-called value stocks. The bank did, however, single out State Street , Lear and Bank of New York Mellon among its top picks of those positively exposed to rising bond yields. The three U.S. firms were found to score in the top quintile on "environment," according to data from Sustainalytics, and had a positive correlation with U.S. 10-year bond yields over the past 12 months. Home Depot , Adobe , PepsiCo were named by Bernstein as being among the stocks with the highest pricing power and ESG scores. Europe ESG funds in Europe were found to be particularly exposed to rising inflation and the bank said tighter constraints and regulations on sustainability made lowering inflation risk more difficult than in other regions. Nonetheless, ING , Eni and TotalEnergies were picked out among the region's high-scoring ESG stocks within industries that are positively exposed to rising bond yields. Neste , Norsk Hydro and Kingfisher were all cited as top picks when it comes to strong pricing power and high ESG scores, the analysts at Bernstein said. Asia Asian ESG funds are better positioned than their counterparts in the U.S. and Europe, the bank said. This is likely to reflect the fact that ESG investing is still in an early stage in the region and many investors are predominantly focused on environmental issues rather than fully integrating social and governance considerations, the bank said. Among the bank's high-scoring "improver" stocks in the region that are positively exposed to rising U.S. bond yields are Melco Resorts , Trip.com and Adani Ports and Special Economic Zone .
