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How to hunt ESG opportunities among the ‘sin stocks’

In a world increasingly focused on Environmental, Social and Governance issues, many investment opportunities can be found among “sin stocks” working on an ESG transition. CLIVE BEAGLES explains

  • Improving climate credentials provides investor opportunity
  • ESG stocks alone provide a narrow universe
  • Market is more nuanced in how to consider ESG

IT’S common these days for investors to look for companies that tick all the ESG boxes.

But many of the best ESG investment opportunities can be found among so-called “sin stocks” working on catching up.

ESG-related upgrades from ratings agencies are happening more often at mining and oil companies, than other sectors, observes Clive Beagles, a senior fund manager who focuses on UK equities at Pendal’s London-based asset manager J O Hambro Capital Management

“We measure the upgrades to downgrades of companies based on ESG factor. Our fund has a ratio of about four to one upgrades to downgrades. And about half of those companies being upgraded were either oil or mining companies,” Beagles says.

“You might not like the pace some of the oil and gas companies are changing, but you can’t question the fact they’re trying to change.”

When companies are changing, there’s investment opportunities.

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“When you invest you are always looking for change,” Beagles says. “You look for change in return on capital. You look for change in operating margins. You should also look for change in ESG credentials.

“If a company is improving its ESG credentials, its cost of capital is likely to go down and its ESG rating will go up,” Beagles says.

Twelve months ago investors, and in some cases management themselves, were categorising businesses around whether they met ESG benchmarks or not.

But it is much more nuanced now, Beagles says.

“I think peak ESG was about last November in terms of not investing in older style, non-ESG companies, and looking for pure play opportunities,” he says.

“ESG and climate change are real but the investment world has become a little more balanced about it. Many companies are trying to move in the ESG direction. But now it is more about trajectory of change, rather than absolute scoring.”

Beagles says there is a place for pure plays in the ESG world, and for impact funds.

“But not everyone can do that and it’s a very narrow cohort of stocks,” he says.

“A much broader approach which can be just as useful and relevant is to encourage companies to change faster. And that’s very much what we are doing.”

Beagles says the shift among investors has been quite marked.

“A year ago, clients might look a bit blankly about investing in an older style company and say ‘they still have coal’. Now they are starting to understand the transition much better.

About Clive Beagles

Clive Beagles is a senior fund manager with Pendal Group’s UK-based asset manager, J O Hambro Capital Management. Clive is one of the UK’s most highly respected equity income managers. He has 32 years of industry experience and co-manages the JOHCM UK Equity Income Fund.

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This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at October 21, 2021. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.

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