Fund managers who invest according to environmental, social and governance (ESG) principles will always emphasise the fact that while their strategy aims to do some good for the world, it is also about scrupulous risk management.
Fred Kooij, chief investment officer at Tribe Impact Capital, a wealth manager, says: “If you consider what ESG is screening for, it’s a common language so investors can speak to management teams about what they are doing to manage these key risks. We are living in a world where the consequences to the environment, society and governance have legal ramifications, so you cannot separate having an ESG framework [from] good, solid risk-adjusted investing.”
Tribe calls itself an impact investor, which takes ESG investing one step further to consider a company’s values and whether it is doing demonstrable good for the world. Amy Clarke, Tribe’s chief impact officer, says that, too, is anchored in risk management. “You are looking at how resilient are their core products and services to the changes we are seeing in society. Do they play to these big themes that are coming through, or are they creating the problems that consumers or regulators are concerned about?”
One place to start looking is the London Stock Exchange’s Green Economy Mark, a list of over 100 companies that generate more than half of their sales from environmental solutions. Companies apply for certification and their data is checked annually against criteria determined by FTSE Russell, the LSE’s index business.
There is a bewildering array of ESG ratings, indices and groupings like this. Clarke says they can be useful because they help investors understand what companies they should be investigating more fully, but she warns against using only one source of data. “In order to do this type of investing, you actually have to work to get underneath the skin of what the data is telling you [and] engage with the company to really understand what it is that they’re doing. This is where a lot of investors fall down.”
Volution
In April, the LSE awarded a Green Economy Mark to Volution, which makes everything from extractor fans to whole building ventilation systems that also recover heat.
A global pandemic caused by an airborne virus has forced the world to wake up to the importance of ventilation and could lead to more stringent regulation of indoor air quality. At the same time, Volution looks set to benefit from a raft of new climate change regulations in the countries where it operates. Improving energy efficiency involves making buildings more airtight, which usually requires new ventilation.
In the UK it is likely that from 2025 new builds will have to have mechanical ventilation and heat recovery to meet regulations to cut carbon emissions. Elsewhere, New Zealand has adopted new rules to ensure that rental properties have good ventilation; and the EU Green Deal is expected to bring yet more demand for Volution’s products.
Ronnie George, chief executive, says his aim is for the company to grow by 3 per cent to 5 per cent a year from ongoing business, which will be boosted with acquisitions that help Volution enter new markets. In December, Volution made its biggest acquisition to date, buying the Dutch company ClimaRad for £36 million. Lush Mahendrarajah at Berenberg expects the company to end the year with the same level of debt as earnings and on that basis estimates that it still has about £80 million to buy up other companies.
The shares have almost tripled since September but pulled back in recent weeks as investors took profits. They are now changing hands for 422p, which is 20 times forecast earnings for this year. That looks cheap compared with building products companies across the UK and Europe, which trade on an average of 32 times forecast earnings. With construction work bouncing back, any fresh update from Volution is likely to be positive, making it an extremely good time to buy the shares. The company paid no dividend last year owing to the pandemic but a dividend yield of about 2 per cent is expected this year.
Advice Buy
Why Share price represents a good opportunity
Impact Improving indoor air quality and energy efficiency
Renew Holdings
Another Green Economy Mark company is the Aim-listed Renew Holdings, which carries out maintenance of the rail network, roads, telecom towers, plumbing and pipework. Its customers include Network Rail and the Highways Agency. News of the government spending £640 billion on infrastructure over the next five years is very good news for Renew.
Renew has been savvy about buying companies that will benefit from that spending boost at decent multiples. One such purchase was its £5 million deal to buy Rail Electrification Limited, which provides services and machinery to install overhead lines to electrify the rail network. Network Rail has said it plans to spend up to £1.8 billion a year on electrification to cut carbon dioxide emissions. This deal adds to the services Renew can offer its rail customers and should help it win more contracts.
Elsewhere, it’s likely to see growth from servicing 5G infrastructure, increased spending on water, and nuclear decommissioning work.
Renew has the benefit of the long contracts offered by public sector organisations but does not carry the same risk as larger competitors such as Kier or Costain. Its contracts are much smaller and prices are generally not fixed so the risk of mispricing a contract is much lower.
It ploughed on through the pandemic as its work is considered to be of critical importance. Tom Fraine at Shore Capital says its ability to control costs and resilience has been better than most industrial companies. The shares are changing hands for 659p, about 14 times forecast for earnings this year, and look cheap considering the trends that will underpin demand.
Advice Buy
Why Revenues underpinned by regulatory spending
Impact Helping to cut carbon from rail travel
