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3 top ESG stock picks

David Brenchley  |  24 Jan 2019Text size  Decrease  Increase  |  
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biotechnology, test tube, sustainable investments, Liontrust

Sustainable investing is no longer a choice between morals and profit. ESG considerations have proven to maximise investor returns; whether it is tapping into a thematic economic driver, or avoiding losses associated with scandal.

Successful asset managers, and not just those with specific ESG charters, have become increasingly vocal on the topic - including UK-based managers Hermes, Investec and Liontrust.

Liontrust’s sustainable investment strategies were devised 18 years ago, when the team was working for Aviva Investors. Since launching in 2001, its three equity offerings have all more than doubled unitholders’ cash.

“We have seen some really good, positive trends in making our world cleaner, healthier and safer,” explains Peter Michaelis, co-manager of the fund range.

For example, carbon dioxide emissions have fallen dramatically across the developed world; New York’s air is the cleanest it has been since monitoring began.

Smoking rates have fallen from more than a quarter of the population 18 years ago to just 17 per cent today, while cancer sufferers are much more likely to survive than before.

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Infant mortality rates have fallen 40 pr cent in the UK alone during that time, while, incredibly, China’s rate is down fourfold. Moreover, the number of road fatalities and workplace accidents have both halved.

“These statistics are of real relevance to investment because many of these changes have been delivered by businesses which have generated massive profits by providing the innovative solutions required,” explains Michaelis.

The team continues to back these innovators. “We find companies that are becoming incredibly successful, generating strong returns for shareholders by delivering a cleaner, healthier and safer world," he adds.

Below, the team picks out three firms in which they invest.

Life-saving blood plasma

A decade-long holding of Liontrusts's Sustainable Future Global Growth fund, Australian biotech company CSL (ASX: CSL) has delivered returns of more than 20 per cent on an annual basis during this time.

With society ageing rapidly, biotechnology companies are increasingly popular. “As our knowledge of how the body works increases, this enables us to come up with much better, more cost-effective ways of treating disease and getting good patient outcomes,” says another member of Liontrust's ESG team, Mike Appleby.

CSL is taking advantage of growing demand for blood plasma products, which are increasingly being used to save lives and treat things like burns, trauma and shock.

Blood plasma proteins are naturally occurring in the human body and are being used to successfully treat immune disorders and haemophilia. It is also extremely cost-effective. In fact, the World Health Organisation recently included blood plasma products on its list of essential medicines. This makes them a minimum requirement for any basic healthcare system.

Despite its impressive returns, which have seen the share price surge beyond $198 from $36 in 2009, Appleby reckons there’s some way to go still. “We think the market still underestimates the continued profitable growth that this company will be exposed to and we think it’s still a very compelling investment.”

Recycling fit for Adidas, Breitling, Speedo

Plastic pollution is one of the top environmental concerns around the world, having been highlighted by the likes of Sir David Attenborough, who tackled the issue in his BBC documentary Blue Planet.

While plastic can never be eradicated entirely due to the utility of the material, a significant portion of the 400 million tonnes produced each year globally can be substituted. Public awareness and demand for single-use plastics is heightened; the next challenge is to raise awareness on industrial manufacturing lines, claims Liontrust's Harriet Parker.

“We’re going to have to move from this linear, extractive economy where we make and dispose to a more circular one, where products are made to be made again and again,” she explains.

Plastic pollution is not solely about plastic bottles. Fishing nets account for nearly half of all the plastic found in the stretch of water that lies between California and Hawaii, is three times the size of Paris and has been dubbed The Great Pacific Garbage Patch.

Italian textile manufacturer Aquafil rescues hundreds of tonnes of plastic from the sea in the form of fishing nets and other nylon-based products like old carpets. It recycles this into a yarn it calls Econyl.

Econyl is used by big brands like Adidas, Breitling and Speedo in their apparel products as well as makers of carpets and other interiors products.

The team believes that the Econyl brand will continue to become recognised and used by other larger firms, allowing Aquafil to “capture more of the end-product margin”. The Liontrust Sustainable Future European Growth fund first invested in the Milan-listed company in June 2018 before topping up during the sell-off in the fourth quarter of last year.

“Our analysis indicates that the market is underestimating just how strong and obtainable its growth will be,” says Liontrust's Harriet Parker.

Returns 'nearly double global stock market'

Irish manufacturer Kingspan has been a holding of these strategies for a decade or more, says Liontrust's Appleby. In that time, the share price has grown from a couple of cents to almost €40 today.

It’s delivered average total shareholder returns over the past 10 years of around 17 per cent per annum. That is “very impressive and nearly double that of the global stock market”, Appleby continues.

The stock has paused for breath in the past year, though, and is currently trading at the same level it was at the start of 2018. Appleby thinks “it looks like a compelling investment at these levels”.

The firm plays into the team’s energy efficiency theme. It says it is the global leader in high-performance insulation and building envelope solutions. Essentially, explains Appleby, 85 per cent of their sales come from smart, more efficient ways to heat and cool buildings.

It makes insulated panels, environmental management systems and renewable energy solutions for businesses across the UK, mainland Europe and the Americas.

Appleby concludes that Kingspan is “well-positioned to benefit from this tailwind of demand for their products which enable us to use energy more efficiently, cut emissions and save money”.

 

 

is a Reporter for Morningstar.co.uk.

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