ESG investing has come into vogue in recent years, becoming particularly prominent in 2020. A study by OnePlanetCapital found that the environmental, social and governance-based investment market is set to double in 2021.
So what ESG investing? It’s investing with ethical considerations front of mind, this includes companies that actively seek to reduce their social and environmental impact, for example not polluting the earth, selling products that kill people and so forth.
Clearly, in some industries this is easier than in others. It literally stands for environmental, social and governance. So, it’s investing with these concerns front of mind.
Reasons ESG investing will continue to grow
I see no reason why the trend towards more ethical investing will not continue, especially as institutional investors take more note of the trend – with a result of that being that shares which have high environmental and social aspects, alongside business that are well governed – should do well going forwards. For that reason, I’m keen to tap into the ESG investing trend.
High profile international events such as COP26, the Biden administration’s focus on the environment, as well as the UK government’s focus on the issue, ought to keep climate change in the spotlight. The focus on the problem and public pressure, like we saw after Blue Planet and the backlash against plastics, ought to underpin the transition to more ESG considerations when it comes to investing.
The well-publicised governance issues at Boohoo may serve as a reminder to institutional investors about the importance of the ‘G’ in ESG. Although admittedly the fast fashion retailer continues to do very well and its share price is recovering after the publicity of what was happening at its outsourced Leicester factories. Perhaps that’s because Boohoo was seen to take swift and decisive action to address the issues?
As the Boohoo example shows, it can be challenging to work out which shares have strong ESG credentials. For example, are oil shares still poor ESG investments if they invest heavily in green energy? Are banks unethical if they charge interest and make charge higher rates typically on poorer and more vulnerable members of society? These are big questions, which makes ESG investing a tricky area, in my view.
With all that in mind, I’ve seen though that Prudential (LSE: PRU) is held by professional managers such as Royal London that are running ESG funds. For me AstraZeneca (LSE: AZN) also fits the bill.
What’s happening at Prudential?
The FTSE 100 listed insurer, Prudential, is undergoing a quite radical restructure. Once finalised, it will have far greater exposure to the faster growing Asian market. Its due to demerge the US business, Jackson, in the second quarter of 2021.
Increased digitalisation is expected to help bring down costs. This combination of growing margins and all going well, strong revenue growth, could really boost the share price. A tangible example of this is the Pulse app. The health and wellbeing app had reached over 20m installations. The company reckons it is helping digitally convert new customers, with over 1.5m customers accessing one of its services through Pulse.
The downsides and risks are that Prudential will become increasingly reliant on insurance in Asia. To what extent might falling birth rates hit the value of this market in future? Is the narrative than an expanding Chinese middle class will start buying insurance too simplistic?
A focus on growth in Asia may also mean the dividend is smaller than in years gone by. The hope for investors must be that stronger revenue growth and financial performance will boost the share price. Prudential, unlike other UK listed insurers is more about capital growth (or the hope of it), than about a high dividend income.
So what makes it a strong ESG share?
Prudential’s ESG strategy has three main parts. According to them these are: “making health and financial security accessible; stewarding the human impacts of climate change; and building social capital.”
The most tangible example of its commitment to ESG comes from it being a signatory to the Task Force on Climate-related Financial Disclosures (TCFD) framework (TCFD). The full ESG report can be read on the company’s website.
On top of that, it is well managed and the Pulse app as well as being a useful business tool I think shows that it’s a socially conscious company. Insurance might not be anyone’s favourite product, but it is vital and Prudential has always struck me as being a savvy and decent operator.
Trials and tribulations at AstraZeneca
I hold shares already in the FTSE 100 pharmaceutical group, AstraZeneca (LSE: AZN). The group’s share price I think has been hit by the public spat with the EU over Covid-19 vaccines. That’s taken the shine off what had been a very decent run of growth, over quite a long period of time. Much of the past decade in fact.
However, its expertise are really in oncology, not vaccine development. Providing patent protected treatments for cancer is where the future blockbuster drugs will come from. The revenues and profits from these drugs, once they’re commercially approved, will help lower the debt and help AstraZeneca grow its dividend more strongly in future. That’s why I’m holding onto my shares in the company.
There’s always a risk drugs in the pipeline will fail. Recent years though have seen a lot of drug development successes, however. Oncology, so treatments for cancer was particularly strong, validating management’s strategy on focusing on this area. For AstraZeneca there may also be a fear at the company and amongst investors that the CEO, Pascal Soriot, may leave given the recent pay revolt. He is credited with helping transform the company since joining.
I expect once the furore over vaccine delivery does down, investors will once again be willing to pay a high price to get access to AstraZeneca’s superb drug development pipeline. Given it makes medicines, and has been providing Covid vaccines for no profit, I think AstraZeneca has strong ESG credentials.
Other possible ESG investments and where to find them
When it comes to larger cap ESG friendly shares Legal & General, RELX, Experian, Halma and National Grid, SSE are just some examples of shares that potentially have strong ESG credentials.
Generally, industries that strike me as being good for ESG investing are: insurers, housebuilders, utilities, media, grocers, pharmaceuticals, retailers, telecoms and leisure. All of these industries – and certainly the companies within them may still fall short on ESG standards – but this would be a starting point for me for finding possible ESG investments.
In the end, it can be difficult to define where ESG investments begin and end. For a private investor it can be a very personal thing. I don’t have many red lines as an investor, but naturally I think I gravitate towards cleaner industries. My feeling is these should outperform as both professional and private investors look to tap into the growth of ESG investing.
Please note I own shares in AstraZeneca, Legal & General and National Grid.
if you like this article please do share on social media, it would be much appreciated.