Identifying the sectors to benefit from ESG
Asset managers say healthcare, electric vehicles and waste processing companies are among those to watch, writes Nicki Bourlioufas.
As sustainable investing becomes more mainstream, the sustainability winners in coming years could include sustainable food, healthcare, electric vehicles, and waste processing companies, as well as clean energy businesses and their suppliers, according to asset managers.
Stocks with strong environmental sustainability profiles have generally shone in recent times because of a big sustainability push, according to a new research paper from Franklin Templeton, which analyses trends in environmental, social and governance (ESG) investing. But several other types of companies will benefit too from greater demand for their products.
“The sustainability winners over the next market cycle could include discretionary names improving the sustainability of food sourcing and packaging; financials, which are prioritising diversity and inclusion; and, industrials companies enabling energy efficiency and electric vehicles,” says Mary Jane McQuillen, portfolio manager with ClearBridge Investments (formerly RARE Infrastructure) in the paper, Inflation, Rotation and Opportunities.
So far, companies with a clean energy focus have been a big beneficiary of greater demand and that is expected to remain so. The transition to a greener economy will require a cumulative investment of around US$150 trillion from now until 2050 according to International Energy Agency (IEA), says Ganesh Suntharam, chief investment officer at Redpoint Investment Management.
“This creates opportunities to identify companies that have invested in innovative solutions in the renewable and clean energy sectors and/or were early adopters of technological advancements which now allows them to reduce the risk and cost of further investments in their businesses,” he says. Companies focused on overcoming resource scarcity through use of recycled materials will also benefit.
Adds Adam Kirkman, head of ESG at AMP Capital: “We believe this transition will create compelling investment opportunities in climate mitigation, adaptation, clean energy technologies as well as new asset classes. Importantly it brings forward investment decisions about climate change impacts into the investment cycle out to 2030.”
Responding to consumer shifts
Emma Pringle, head of ESG, Maple-Brown Abbott, says sustainability winners will be companies that can provide value to a portfolio while improving social or environmental outcomes—the ultimate ESG win-win.
“Looking ahead, we believe those companies that recognise and respond to consumer shifts for sustainable products will benefit, alongside the companies that best manage current and emerging ESG risks. These risks include management of waste and packaging, cybersecurity and data privacy, and labour risk in the supply chain,” she says.
Robeco has been investing in companies that support a healthier style of living, including investing in organic and natural food companies, and those that provide solutions for food safety and analysis and stocks that are related to fitness, activity, and healthcare prevention, diagnosis, efficiency, and chronic care.
Masja Zandbergen, head of sustainability integration at Robeco, sees opportunities in water, clean energy, and e-mobility.
“This is not just the traditional companies that make solar panels or windmills or that make electric vehicles, but also mostly the suppliers, so the batteries, the lightweight materials, the chips, and software that is helping the companies to make them more energy efficient or to make vehicles electric.
“It remains, however, investing. So, it is always important to keep including valuation measures and to continuously monitor if the business model of these fast-growing companies is still intact,” she says.
‘ESG issues are long-term and thematic’
Franklin Templeton predicts that all investing will eventually be ESG investing, rather than a separate discipline, a statement with which Australia’s biggest super fund agrees. Andrew Gray, director ESG and stewardship, AustralianSuper, says that ESG considerations have always been integral to AustralianSuper’s approach to investing.
“This is because ESG issues are long-term and thematic, and super funds are long-term investors. That means it is essential to incorporate ESG factors into our investment thinking so that we can deliver better long-term returns for fund members,” Gray says.
“More and more we are seeing companies acknowledge that their long-term success and ability to generate long-term value has a direct link to the way they approach and manage ESG issues.
“As a major super fund, we have for some time engaged directly with management and boards of companies and actively vote our shares to encourage long-term thinking and better ESG performance, which improves long-term investment performance.
“Ultimately our key priority is achieving superior long-term investment returns for our members, so it makes perfect sense that ESG issues are part of our investment framework and our decision-making processes,” says Gray.
AMP Capital’s Kirkman describes a similar approach. “AMP Capital integrates ESG factors in all of our investment decision-making, stewardship and active ownership practices.
“ESG is considered both a duty of care, and a skill in diligence undertaken in pursuit of our clients’ best interests. ESG forms an essential component of investors’ fiduciary obligations,” he says.
Part of the investor toolkit
Gabriel Wilson-Otto, director, sustainable investing, Fidelity International, says the COVID-19 pandemic has put a spotlight on the relationship between sustainable business practices and economic resilience.
This focus helped accelerate the pivot from consumers, policy makers, issuers, and investors towards considering the financial and social impacts of inequality, climate change and broader ESG issues.
“Integration of material ESG factors into fundamental company analysis can increase the likelihood of identifying a company’s exposure to, and management of, emerging risks and opportunities. Better information can support more informed investment decisions,” he says.
“With this in mind, consideration of material ESG issues should be part of every investor’s analytical toolkit and be fully integrated into traditional investment analysis.”