Environmental, social, and corporate governance (ESG) investing is here to stay, I believe. But while it’s a reflection of investors’ eco and ethical concerns, such investments should also be profitable — or at least have profits potential. As more money goes to shares with strong ESG credentials, the more the share prices of these companies should rise. Its supply and demand.
Two reasons ESG investments could outperform
There are two main reasons why I think ESG investments could do better than the market more generally.
Lots of pension money is still to come into the sector, which will further boost demand. Pension schemes hold vast amounts of money, yet many haven’t deployed cash into ESG investments. That’s because the primary duty of a pension trustee is to maximise returns.
Once the evidence builds that ESG investments can perform well and aren’t just about feeling good, then I think there will be a flood of money. That will push up prices.
I think it’s also possible to argue that a concentration on the environment, social issues and governance is a sign of good management.
Also, the argument has been made (for example by Fidelity’s Jeremy Podger), that ESG investments could do well financially: “Adopting ESG principles in investment is compatible with — and will likely enhance — the investors’ traditional risk and return objectives.”
The big challenge when it comes to ESG investments is avoiding greenwashing. This is where a company, or indeed a trust or fund, gives the appearance of becoming environmentally-friendly, but in fact there’s not much substance behind the façade. Research for Quilter found 44% of investors are concerned that ESG investments are not what they claim to be.
ESG investing
I’ve already outlined the case for SSE and Prudential in previous articles. For the former, I think its involvement in renewables gives it strong ESG credentials. For the latter, the case is based on many professional ESG investors holding the shares and the fact it is a well run company.
I also think AstraZeneca has strong ESG credentials because it’s supplying Covid vaccine to countries at no profit while the pandemic lasts, it has a strong focus on providing oncology treatments and seems to be well governed and well run too.
When it comes to ESG investments, I think there are other contenders besides these three. And I’m not only thinking of ‘obvious’ ESG picks. One example, I think, is FTSE 100-listed Coca Cola HBC (LSE: CCH). This low-profile, Switzerland-based, company is a bottler of Coca-Cola products (the brand-owning Coca-Cola Company itself is listed in the US and backed by Warren Buffett).
Coming back to the UK-listed company though, Refinitiv data scored it highly on ESG. The bottler is a big part of the US firm’s ‘World Without Waste’ initiative. It aims to make 100% of the firm’s packaging recyclable by 2025.
The concept of the circular economy – where items are recycled and reused through their shelf life – is an important part of reaching net-zero and reducing plastics in the oceans.
On top of that, Coca-Cola could just bring manufacturing in house. But I think that’s unlikely, as it would add a lot of fixed costs. Any reputational damage to Coca-Cola itself could also hit volumes and therefore profits at Coca Cola HBC.