Companies that improve ESG scores are tomorrow’s winners

20 November 2019

It’s important to consider companies seeking to improve environmental, social and governance (ESG) performance, as well as considering current industry leaders in ESG, according to Ausbil Investment Management.

Måns Carlsson-Sweeny, head of ESG research at Ausbil, said those who only focused on investing in the best ESG profiles might end up developing a portfolio of expensive stocks, missing out on growth companies with a positive ESG trajectory.

“It makes sense to identify companies that are working to improve their ESG profiles,” Carlsson-Sweeny said.

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“We believe ESG performance can be a lead indicator of operational performance, and the way companies deal with these types of issues is also a good proxy for management quality.

“Furthermore, companies that are improving their ESG approaches tend also to be those that are improving their overall business.

“And, in turn, that will be reflected in their profitability, risk management, and ultimately their share price.”

He said that recognising that among similar companies, one with a good ESG profile should be valued with higher earnings multiples and trade against one with a poor ESG profile.

The war of plastic was a growing ESG issue with the World Economic Forum estimating there would be more plastics than fish in the ocean by 2050.

“While some companies are responding to this challenge, others are being driven by changing consumer preferences,” Carlsson-Sweeny said.

“This is happening in our own backyard as seen in Australian supermarkets reducing their use of single-use plastic bags.

“The world is changing, and companies need to adapt, and demonstrate that they can adapt. How they approach ESG issues is a proxy for this.”

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