The UK is usually seen as a laggard in the ESG space compared with European countries like Denmark and Germany. Coronavirus and Brexit may have been top of the priority list for the past few years, but the UK Government has also made green investment a key part of its “Build Back Better” programme and Scotland is due to host the United Nations Climate Change Conference (COP 26) in November this year.
“Sustainable investing has a natural home in the UK market,” says Sonal Sagar, manager of the 3-star rated Threadneedle UK Sustainable Equity fund. Globally, governments are focusing their post-Covid 19 recovery plans on sustainability, which means spending on renewable infrastructure, clean energy, and electric vehicles, she says. The UK Government has launched a 10-point plan committing £12 billion a year for a “Green Industrial Revolution”, with three times as much money expected to come from the private sector. It’s no surprise then, that the UK is home to a number of world-leading ESG companies, too.
Sagar highlights chemicals company Johnson Matthey (JMAT) as a key example of a firm expected to benefit from this new wave of green investment. It has a leading position in electric vehicle batteries and hydrogen fuel cells, two booming areas in this space. Morningstar analysts assign the company a narrow economic moat because of its research and development expertise, and think the company’s shares are modestly undervalued at just below £30. One of its most profitable divisions is focused on clean air technology for cars and heavy duty trucks, an area benefiting from increasingly strict emissions rules across the world.
Wood Group (WG.) is a very good example of company that has adapted its strategy to a more sustainable world, according to Sagar. “It started off as an oil and gas consultancy, but is increasingly making a transition to renewable infrastructure,” she says. The company offers engineering support and maintenance for power plants and the like, and renewables now makes up more than 25% of its business. “With energy companies all on an urgent mission to address climate challenges and wider ESG issues, WG is well placed to benefit from the accelerating energy transition,” says Ian McLelland, managing director at research group Edison. Wood Group’s shares slumped almost 70% in early 2020 from 420p to 137p, but have since recovered to over 300p, helped by the improving prospects of the energy sector.
Engineering firm Weir (WEIR) is a top 10 holding in the Threadneedle sustainable fund’s portfolio and operates in similar sectors to Wood Group. The company started by manufacturing pump products for the oil and gas sector, but recently sold this division to focus more on its global mining and infrastructure clients. From an ESG standpoint, the “environmental” aspect is covered by a pledge to halve carbon emissions by 2030, while the “social” side involves a commitment to “zero harm” for its engineers worldwide (reducing accidents and fatalities is a big focus for mining firms in emerging markets). ESG ratings agency Sustainalytics, a Morningstar company, rates Weir as a leader in corporate governance and ranks the company as “Medium” risk, below its industry average.
Wind energy is a key focus for the UK Government with plans to generate 40GW of electricity from offshore wind by 2030 – enough to power all UK homes and a 400% increase over 10 years. SSE (SSE) is a key player in this field and Morningstar analyst Tancrede Fulop thinks investors have not fully priced in the company’s ambitions to be a leader in offshore wind. SSE sold its “book” of residential energy customers to Ovo, which Fulop says was a wise move considering the tough competitive and regulatory environment. The stock makes up nearly 5% of the Invesco UK Opportunities fund, which has a 4-star rating and 1 Globe (for more on Morningstar’s sustainability ratings, click here). Its manager Martin Walker thinks the UK has the potential to be “carbon-negative”, effectively exporting its surplus renewable energy or selling “carbon credits” to other countries. “This is an area where the UK has the potential to be a winner,” he says.