The surprise companies you may not expect to find in a sustainable fund

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23/11/2018
Sustainable investing is a hot topic at the moment, with growing numbers of investors putting principles on a par with returns.

The amount of money held in ethical funds has more than trebled in the last 10 years to £16.7bn, with young people showing a particular interest in making a difference via their investments. Research suggests 85% of UK millennials are currently investing in ethical and socially responsible funds.

In addition, a third of non-investors say they would invest for the first time if they could do so ‘ethically’.

Traditional ethical funds typically exclude sectors with controversial business practices  – companies involved in unsavoury practices such as weapons and tobacco, for example.

However, nowadays sustainable funds tend to take a more pro-active approach.

Ben Johnson, collectives analyst at broker Charles Stanley, says: “Rather than just focusing on investments to avoid, they’re now actively seeking out companies which make a tangible positive contribution through the product or service they provide.”

Here, three fund managers who run sustainable strategies each share one stock you may be surprised to find in their fund.

Bank of America 

Louise Dudley, manager of the Hermes Global Equity ESG fund

With the dark days of the financial crisis now a distant memory and the Federal Reserve commencing QE [quantitative easing] unwinding, it is worth reflecting on Bank of America, which was almost brought to its knees in that period. It is a very different beast nowadays and encouragingly has, through its lead independent director, shown itself to be open to constructive dialogue with Hermes EOS, our in-house stewardship team.

Despite the progress we have seen, the company is still viewed by some as a “bad actor” from an ESG [environmental, social and governance] perspective. Here, we hope to share some of the insights we’ve seen and therefore the rationale or inclusion within our global equity funds.

The management team is fostering a culture of responsible growth, ensuring that the lessons from the financial crisis have been learned. Part of the responsible growth strategy relates to climate change, particularly low carbon financing. It is ahead of its target, which is encouraging. In addition, the bank continues to review its pay and ‘human capital management practices’ to ensure there are no meaningful flaws in them.

Bank of America is a long-standing holding. The ESG Dashboard, our proprietary company valuation tool, shows a company that has an ESG score greater than its peers, which is changing for the better.

Orange

Chris Hiorns, manager of the Amity European fund at EdenTree Investment Management

From our perspective as a responsible and sustainable investor, Orange is a company with a long-term goal to promote a digital society where everyone can benefit from technology. The company has also made good progress in reducing its environmental impact and has reached its greenhouse gas emission reduction target three years ahead of the deadline. Therefore, it has now committed to setting a more ambitious and science-based target in the next two years, which will align its business with the goal of the Paris Agreement.

On most valuation metrics, Orange trades at a discount to the wider telecoms sector. It has a strong market position in its home, French telecom market and in Spain where it has built out its own fibre offering, placing it in a strong position to compete with the incumbent operator, Telefonica. It is on a dividend yield of 5% and forward price earnings of around 13.

Kerry Group

Peter Michaelis, head of sustainable investment at Liontrust

As interest in leading a healthy lifestyle rises globally, we have identified companies providing “reformulation” services to make food healthier – stripping out the fats, sugars and salts while maintaining the taste.

These companies are benefiting from demand for healthier food as their customers, many of which are the big incumbent food producers, respond to changing consumer preferences. This move towards an improved diet is having a positive health impact, helping to reduce non-communicable diseases such as obesity and cardiovascular disease.

One of our key long-term holdings is Irish-based food technology company Kerry Group.

Kerry enables what it calls the ‘five Rs’: reduce, remove, replace, reinvent and reposition. Its “sensory scientists” work to reduce calories, remove artificial chemicals and replace them with natural alternatives. For example, in carbonated soft drinks, they’ve switched sugar for botanical extracts which has both a health benefit and gives them new flavours for consumers to enjoy.

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