Written By: Abbie Llewellyn-Waters
Abbie Llewellyn-Waters of Jupiter Asset Management explains how ESG analysis can determine favourable company growth outlooks across a range of sectors
Focusing on sustainability can often be mischaracterised as operating within a restrictive investment universe. And it’s true that ethical or thematically focused funds can limit the stocks a portfolio is “allowed” to invest in.
However, an alternative, sustainable approach that is unconstrained is possible. Fundamental company analysis that is enhanced by Environmental, Social and Governance (“ESG”) data can be essential to identifying high-quality companies whose businesses are run for the long term.
I’m often asked whether using ESG analysis is too restrictive, particularly by trustees and consultants who are starting to focus more closely on this investment approach. Many have the perception that any ESG integration requires multiple sector exclusions and a performance compromise.
A company’s financial robustness can be the starting point in determining its long-term sustainability, moving on to deeper ESG considerations that investigate the fibre of the company. This kind of ESG integration enables greater understanding of the broader risk profile of well-capitalised businesses on a longer-term basis. Rather than being restrictive, this kind of in-depth approach can help better identify high-quality businesses in all sectors that are running their companies for the long term. It’s positive inclusion, rather than restriction or negative exclusion. The simple investment thesis is that companies which deliver tangible, positive outcomes through their operational approach, product or service will have a structurally supported trajectory.
Here are a few examples of how ESG analysis can be applied to a range of sectors to determine favourable company outlooks.
Given the nature of this sector group, focusing on energy intensity of products is an interesting angle to understand the long-termism of businesses and how management is planning to take advantage of the global transition to a low carbon emission economy. Two company examples are provided below.
Honeywell’s management team are disciplined, particularly on a return-on-capital-employed basis, with a focused corporate strategy. The company has completed a number of disposals and spin-offs recently that highlights the constant discipline of considering the long-term resilience of the business and how to best position it. If we take a company’s approach to its energy intensity and how it sought to mitigate this by improving either its products or its own processes, it is a key example of a longer-term mindset by a management team that underpins the basic premise of sustainability.
Danaher is another company for which a deeper consideration of ESG factors can provide powerful insights into its long-term prospects. The company makes test and measurement equipment and supplies for a variety of health and environment end markets, such as laboratory research. It has a long-term, consistent and highly successful approach to leading industry consolidation, its products deliver strong environment and social benefits, and it understands that the success of its business is driven by the quality of corporate culture.
Both companies are progressive business leaders in their markets, with forward-looking management teams that place the long-term health of their business at the forefront of all capital decisions, and are benefiting from environmental and social trends.
The key to identifying sustainable, long-term businesses in this sector is to look for firms able to deliver both growth and consistent internal returns. Within the broad Information Technology sector, many of these opportunities can be found within the fast-evolving area of digital payments, which includes companies such as Visa, Mastercard and PayPal. Financial technology companies, banks with specialist products, and mobile payments operators have a clear and attractive long-term trajectory from both a growth and sustainability perspective as they participate in and facilitate the mass digitalisation of monetary transaction.
The growth of digital payment companies is underpinned by the long-term secular growth driver of “financial inclusion”. Financial inclusion refers to individuals and businesses having access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.1 The theme has been broadly recognised as critical in reducing poverty and achieving inclusive economic growth.
An allocation to digital payments also has the potential to help with portfolio diversification, by providing exposure to the financial sector and the velocity of the global economy without taking on the embedded loan book risks of traditional banks.
Within healthcare, preventative healthcare is a key driver for sustainable global growth. Invariably, preventative healthcare and early diagnosis lead to better patient outcomes, increasing population longevity while reducing associated long-term critical care costs. There is a clear structural rationale behind identifying high-quality companies in this area, using ESG analysis of their products and thinking carefully about their true sustainable social benefit.
A focus on disease prevention can provide a lens to finding multiple opportunities across the value chain, from medical tool firms, diagnostic firms and specialist pharmaceuticals. For example, CSL, which develops auto-immune products, has consistently invested in its research facilities, delivering state of the art development centres which can broaden their product range. It has achieved a robust global position in a concentrated market, supported by a compelling secular growth story underpinned by a well-capitalised business and resilient margins. This long-term sustainability makes it a structurally attractive healthcare opportunity.
In summary: using ESG to achieve alpha
Applying ESG in the investment process doesn’t need to be restrictive. On the contrary, an intelligent approach that integrates ESG analysis on a case-by-case basis, as shown in the variety of examples above, is crucial to assessing how likely a company is to achieve sustainable long-term returns. In my view, global companies that deliver measurable economic, environmental and social impact are best placed to help achieve positive and attractive long-term financial returns.
For Investment Professionals Only. Not for use by Retail Investors. This content is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. Company examples are for illustrative purposes only and are not a recommendation to buy or sell. The views expressed are those of the writer at the time of writing, are not those of Jupiter as a whole and may be subject to change. Jupiter Unit Trust Managers Limited (JUTM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ, which is authorised and regulated by the Financial Conduct Authority.