Insight

2024 Q3 ESG Market Review

15 October, 2024

Sustainable companies await discovery

As we reflect on the market dynamics of the year so far, it’s clear that the “Magnificent 7” tech giants have continued to dominate headlines and investors’ attention. Their 37.5% combined performance to end of September, fueled by the artificial intelligence (AI) revolution, has led to a market polarization rarely seen before.  We argue that the latter has left many excellent sustainable companies ignored, despite strong fundamentals and positive contributions to global challenges.

There are many companies that illustrate the point above, consider for example this US based cybersecurity leader. The company has grown profits by 34% across the last two years, it has $1.5bn net cash on its balance sheet and it protects its customers from an astounding 1.4 million

online attacks every minute. As digital threats continue to evolve, its role in safeguarding businesses and individuals becomes increasingly vital. Another underappreciated opportunity is Indian Commercial Bank. As the leading mortgage provider in India, this firm has contributed to raise mortgage penetration to 12% of GDP as at March 2024 while delivering a return of equity of 17% but trading at an attractive 2.5x price to book. With its extensive reach into 165,000 rural villages, it is also democratizing access to financial products. This commitment to financial inclusion is not only socially impactful but also taps into a vast market potential.

Last but not least, consider this German semiconductor manufacturer. The $48bn company has doubled sales in the past four years and grown free cash flows by 41% p.a. during that period. It is estimated that its products save 34 times the emissions they take to produce[1]. As the world transitions to cleaner energy solutions, they play a crucial role in improving energy efficiency across various sectors.

We get exposure to these opportunities via the Stewart Investors Worldwide Sustainability fund, which focuses on long-term capital growth while prioritizing sustainable development. Their investment thesis is that, by investing in companies on the right side of change, you can achieve a long-term return ahead of the wider market.

The companies discussed in this note, among others in the fund, demonstrate that sustainable investing should not necessarily mean compromising on the quality of the business fundamentals. In fact, their focus on addressing critical global challenges positions them well for long-term growth and resilience. Currently the market is not appreciating the opportunity and we are seeing a dislocation between fundamentals and share price performance.

While the allure of high-flying tech stocks is undeniable, we cannot overstate the importance of maintaining a diversified portfolio.

The concentration risk posed by overexposure to a handful of companies, regardless of their current success, is significant.

By including a range of sustainable performers in our portfolio, we not only mitigate risk but also align investments with positive global impact.

As we move forward, we anticipate that the market will gradually recognize the value of companies driving sustainable solutions. The global shift towards addressing climate change, social inequality, and other pressing issues has the potential to create tailwinds for businesses at the forefront of these efforts. Moreover, regulatory changes and increasing consumer awareness are expected to further bolster the case for sustainable investing. Companies with strong ESG profiles may find themselves better positioned to navigate future challenges and capitalize on emerging opportunities.

In conclusion, while the Magnificent 7 have captured the market’s imagination with their AI-driven growth, we encourage our clients to look beyond the headlines. The sustainable investing landscape is rich with companies making significant impacts on society and the environment while delivering solid financial performance.

By maintaining a diversified portfolio, we hope to increase the chances of positioning ourselves to benefit from both the current tech-driven market and the long-term trends shaping our world. As always, we remain committed to helping you achieve your financial goals while contributing to a more sustainable future.

 

 

Tiziana Maida

Head of Research

 

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