Abbie Llewellyn-Waters, manager of the Jupiter Global Sustainable Equity strategy, explains how she applies ESG analysis to determine favourable company growth outlooks across a range of sectors
Running a strategy focused on sustainability can immediately bring forward perceptions of a restrictive investment universe. From the use of ethical screens to thematically focused funds, many strategies covering this area limit the stocks a portfolio is ‘allowed' to invest in.
The Jupiter Global Sustainable Equities strategy, managed by Abbie Llewellyn-Waters, is completely unconstrained in its sector and geographical exposures. The strategy offers investors access to high-quality companies whose businesses are run for the long term. Importantly, attractive growth prospects are identified across the investment spectrum by enhancing fundamental analysis with ESG data.
"We are often questioned on how embedding environmental, social and governance (ESG) analysis in the process can be restrictive, particularly by trustees and consultants who are starting to focus more closely on this investment approach. Many have the perception that any ESG integration requires multiple sector exclusions," explains Llewellyn-Waters. "Our process chiefly considers economic robustness as a determining factor of long-term sustainability. Well-capitalised businesses with strong or improving operational efficiency are paramount to our stock selection process. We then use ESG considerations to help establish a company's broader risk profile on a five-year forward basis. As a result, we consider the use of ESG in our stock selection criteria as a method of positive inclusion; it helps identify high-quality businesses that are running their companies for the long term."
These global leaders of their industries are producing strong financial returns for long-term growth rather than short-term gain. This unconstrained approach helps emphasise the firms' sustainable footprints, and has unintentionally led the portfolio to have a 90% lower carbon footprint than the underlying MSCI All Country World index.
Here, Llewellyn-Waters explains how she has been able to apply ESG analysis to a range of sectors to determine favourable company outlooks.
Last year, an independent report by CDP (formerly the Carbon Disclosure Project) on the capital goods sector highlighted conglomerates Honeywell and Siemens as two of the highest-ranked in terms of the transition to low-carbon emissions.
For Llewellyn-Waters this was no surprise, given that Honeywell and Siemens have been previously identified by the team as business leaders in their sector in both financial and sustainable terms. "The vast majority of the firms that interest us, and what is symptomatic of the type of management discipline we look for overall, often involve a strong management team that is typically more conservative and places the long-term health of their business at the forefront of all capital decisions.
"What struck us with Honeywell was the discipline of the management team, particularly on a return on capital employed basis, as well as an increasingly focused corporate strategy. It had completed a number of disposals and spin-offs recently that highlighted the constant discipline of considering the long-term resilience of the business and how to best position it. Take its energy intensity and how it seeks to mitigate this by improving either its products or its own processes, it was a key example of that longer-term mindset by a management team that underpins the basic premise of sustainability. The CDP report clearly verified that for us."
The key to identifying sustainable, long-term businesses in this sector is to look for firms able to deliver both growth and consistent internal returns. For Llewellyn-Waters, the answer lies partly in the growing digital payments sector, which includes firms such as Visa, Mastercard and PayPal. This sub-sector of US financials has a "clearer and more attractive long-term trajectory from both a growth and sustainability perspective" than larger and more traditional banking giants.
"Our higher conviction in digital payment companies is underpinned by the long-term secular growth driver of financial inclusion. It also helps to diversify the portfolio through the financial sector participating in the velocity of the global economy without taking on undue loan book risks [like traditional banks]," she says.
On the broader societal world stage, these types of companies facilitate social mobility through providing products that enable financial inclusion.
Preventative healthcare forms a core position in Llewellyn-Waters' portfolio: "We know preventative healthcare and early diagnosis leads to better outcomes, increasing population longevity while reducing associated critical care costs. So there is structural rationale behind identifying sustainable companies in this area."
This focus on disease prevention has led to multiple investments across the value chain, from medical tool firms, diagnostic firms and specialist pharmaceuticals. Llewellyn-Waters points to CSL, which develops auto-immune products and is a good example of a firm in the sector with strong and long-term structural growth prospects.
"The focus on immunotherapy innovation means CSL continues to see strong structural growth as a result of its focus on broadening their product range where there is competency, adjacency and capability. It enjoys a global position in a concentrated market, supported by a robust secular growth story and underpinned with a well-capitalised business and resilient margins. This long-term sustainability allows us to observe it as structurally appealing, attractive healthcare stock for the strategy."
Abbie Llewellyn-Waters is a global equities fund manager in Jupiter's Environment and Sustainability team
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