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31/07/2021

Making Cents: Your guide to ESG investing (Part 2)

Making Cents: Your guide to ESG investing (Part 2)

Only ever invest in financial products that match your knowledge and experience

If implementing an ESG strategy is something you are interested in doing, there are many ways of going about it. In terms of individual stocks, its relatively easy to find information regarding a company’s ESG involvement and scores online.

There are also a growing number of investment funds and ETFs that only include companies that meet certain ESG standards. And you can find information about the composition of a fund on the issuer’s website.

As promised last week, I’m going to give you some suggestions to start you off and important to note from the outset, the information in this article is not written for advisory purposes, nor does it intend to recommend any investments.

Please be aware that facts may have changed since the article was originally written. And remember, investing involves risks. You can lose all or a part of your investment, which is why I always advise that you only ever invest in financial products that match your knowledge and experience.

ESG Mutual Funds x 2

New Ireland has eight funds that fall under their ESG fund range and one of them is a Water Fund.

The fund is split, where 35% is invested in infrastructure, 34% in wastewater utilities, 29% in technology and 2% in cash.

It’s returns have been impressive. The performance as of 4th June, has been +1.4% one month, +12.7% three months, +18.1% year to date and +35% 1 year.

Aviva has a Stewardship Ethical Fund which again only invests in companies which meet certain ethical criteria. And Accenture is one of their top ten holdings in this fund.

And again, the performance of this fund is impressive i.e. +7.14% three months, +9.89% year to date and +25.81% for 1 year.

ESG Focused Companies x 4

Over the past number of months, I’ve been reading and listening to commentators who are recommending investors take a closer look at particular companies who fall under the sustainable investing model, and a number of them keep talking about a water tech company called Xylem.

Less than 1% of water on earth is usable by humans and one in three lack access to safe water as per research by Fidelity investments.

Xylem is focused on combating water scarcity and is using innovate methods and it’s data driven approach to water usage (smart meters and sensors that detect leaks) along with focusing on improving infrastructure, help industrial firms, utilities and homeowners conserve and manage water.

It has expanded into emerging markets, including China, India and Brazil and there are, a backlog of projects it needs to deliver this year, which according to Morningstar is up more than 30% should all help boost revenue by 5% to 6% this year.

It’s share price has increased by 65% over the past year.

Electric cars account for 3% of total global car sales but that’s expected to increase to 7% by 2023 and will reach 31% by 2040.

And Aptiv is an auto parts maker whose electrical components help power EVs and the data they deliver along with their technology, which is widely accepted as cutting edge, is being likened to the cars brain and nervous system. It counts 23 of the 25 biggest automotive related firms as clients.

And rather than investing in a company like Tesla whose valuation is considered very high, investing in a company like Aptiv for the long term, who have a big part to play in the EV market, and whose share price isn’t overinflated, might be worth considering.

It’s share price has increased in value by 83% over the past year.

Then there’s a company that produces recyclable aluminum cans and glass containers, called Ardagh. And it may not appear to be a particularly exciting investment, but their valuation is considered as trading at half the valuation of the broad market. It counts Heineken, Coca-Cola as clients and according to Metal Packaging Europe, an industry association, cans are the most recycled container in the world.

Ardagh are the antidote to plastic. And the higher recycling rate for aluminum lowers Ardagh’s carbon footprint and boosts demand for its cans.

It’s share price has increased by 77% over the past year.

And General Motors plans to launch 30 new all electric models by 2025 and expects that 40% of its car sales by then will be battery operated. They have a big presence in China, the world’s largest EV market. They can power a car on full charge for about 400 miles which is comparable to Tesla’s Model S EV.

They are trading at nine times earnings and when you put that alongside Tesla’s which is twenty, they look like an attractive buy.

ESG ETF’s x 2

If you are looking at an ethical green ETF, then have a look at the Change Finance U.S. Large Capp Fossil Free ETF.

It excludes companies involved with oil, gas, coal, tobacco, betting, along with businesses that produce nuclear power and or those who process and burn fossil fuel.

Companies with a history of discrimination, violating human rights or labor laws are also a no-no.

And companies who fail from an environmental perspective related to pollution, land use or the health impacts if products and the management of hazardous substances are also not allowed.

The performance of this ETF over the past 12 months’ has been +63.49% and 3-year averaged annualised +18.17%.

The EURO STOXX ESG Leaders 50 Index provides access to companies that are global leaders in terms of environmental, social and governance criteria, based on ESG indicators provided by Sustainalytics.

The performance of this ETF over the past 12 months’ has been +43.50% and 3-year averaged annualized +31.80%.

Summary

Let me repeat, these ETF’s and mutual funds and companies are for suggestion only. There are many more available and you can search out which ones are most congruent and satisfy your values most.

And even though there is a focus on green stocks, like anything you invest in, you’ve got to be careful because some analysts are suggesting that because some green stocks have skyrocketed in value, they won’t always keep going up, and they could drop by significant amounts i.e. some are suggesting they could decline in value by as much as 50%.

So, be careful, but you can mitigate that impact if you’re a long-term investor i.e. if your time horizon is > 7 years.

But it’s worth noting nonetheless that most fund managers are very cognizant of not only the global threat climate change will have on our planet, but also on companies they invest in. Larry Fink is the CEO of Blackrock, which is a company that manages $9 trillion, said, there is no company whose business model won’t be profoundly affected by the transition to a net zero economy. He went on to say, if companies don’t act, they will, see their businesses and valuations suffer.

So, it would suggest that companies with a focus on ESG investing should be part of your investment portfolio, no matter how big or small that is in the years ahead.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted by email at liam@harmonics.ie or via harmonics.ie

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