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5 ESG shares ideas

Using the FTSE4Good index, we take a look at 5 ESG shares ideas.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

The FTSE4Good index series – in its own words – is designed to measure the performance of companies demonstrating strong Environmental, Social and Governance (ESG) practices.

Not everyone will agree with all the names that appear on the FTSE4Good lists. But, if you’d like a helping hand identifying companies demonstrating efforts to improve their ESG credentials, it can be a good place to start.

What if I want to go one step further?

Using the FTSE4Good is one filtering tool. In this article we’ve also provided the carbon intensity (Co2 emissions/million in revenue (USD$)) of the companies we discuss.

Looking at how much carbon is produced per unit of profit is a useful tool, but it’s not a hard and fast rule. It’s important to compare carbon intensity figures with companies from similar sectors. For example, it’s not very helpful to compare the carbon footprint of a software company with an oil and gas major.

This article isn't personal advice. If you're not sure if an investment is right for you, ask for advice. All investments and any income they produce can fall as well as rise in value, so you could get back less than you invest. Past performance isn’t a guide to future returns.

Investing in individual companies isn't right for everyone – it's higher risk as your investment is dependent on the fate of that company. If a company fails, you risk losing your whole investment. You should make sure you understand the companies you're investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

Microsoft – carbon intensity 93.6

We’ve all heard of Microsoft, but what’s it doing on the FTSE4Good index? According to Refinitiv Eikon, this tech giant scores well across Environmental, Social and Governance issues, with the latter two weighted more heavily.

Microsoft’s reporting on ESG issues is very transparent, and easy to find for one thing, with its own ESG hub for investors. It’s doing things like aligning itself to the UN’s Guiding Principles on Business and Human Rights (UNGPs), and trying to keep itself on the right side of the ethics vs technology debate.

In 2018 it published a book which included outlines for the responsible use of Artificial Intelligence. It’s also lobbying the US government to better regulate the proper use of facial recognition software.

But operationally, the company is flying too. New home working trends have only strengthened its cloud computing business, while the classics, including Word, which you have to thank for this article, aren’t doing so badly either. Fourth quarter revenues of $46.2bn rose 21% year-on-year, and profit after tax rose 47% to $16.5bn – well ahead of analyst expectations.

Microsoft divisional operating profit

Source: Microsoft fourth quarter results

Microsoft is also a rarity in its sector, in that it returns some of its extensive cash pile to shareholders through dividends and extensive share buybacks. The prospective yield is 0.9% Yields are variable and not guaranteed.

The current valuation is worth keeping in mind though. At 30.9 times expected earnings, the shares are trading at a 55% premium to the ten-year average. That reflects Microsoft’s strengths, but does mean the market would be very quick to reassess its opinion if things don’t go to plan.

Microsoft share price, charts and research

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Reckitt Benckiser – carbon intensity 183.3

Reckitt Benckiser (Reckitt) is another company that’s seen a boost from the pandemic. The Dettol maker saw sales of its disinfectants and other hygiene products practically jump off the shelves in the pandemic. 2020’s full year revenues rose 11.8% on a like-for-like basis, to £14.0bn.

But underneath the unprecedented trading environment, Reckitt’s been making impressive progress. Digital marketing has lowered the barriers to entry for launching a new brand, leading to an influx of market-share-stealing smaller companies and fierce price competition.

A £2bn turnaround plan is the group’s solution, and while we were sceptical, we’re actually impressed with progress. Streamlining the portfolio and sharpening its proposition have already led to improved supply chains and stock availability. Its huge size does mean it’s going to be a while before the group’s in rude health, but the direction of travel is the right one in our view.

Reckitt’s huge footprint and around 40,000 strong workforce means it has a large job in terms of ESG management. Refinitiv Eikon gives it a stronger score on the ‘E’ and ‘S’ part of the equation compared to governance. It’s impossible to cover all the work being done on these areas for a company as large as this, but product safety’s a big one.

Reckitt’s products are used all over the world, every day. And in the last year, the group passed all its external quality audits, and recorded “100% implementation” of its Culture of Quality action plans across manufacturing sites. That accolade came despite ramping up production and capacity at new sites.

We think Reckitt’s in a good position. But investors should keep in mind, like-for-like revenue growth is expected to be an unexciting 0 – 2% in the current financial year. So they’ll need to take a long-term view, and we can’t rule out ups and downs.

Reckitt Benckiser share price, charts and research

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Mondi – carbon intensity 594.1

A three-digit carbon intensity score might look high. But it’s not surprising given Mondi’s one of the world’s biggest packaging and paper companies. Demand for these things isn’t going to disappear.

So, it’s important to see what Mondi’s doing to minimise its environmental impacts, rather than expect them to disappear altogether.

The annual report can’t tell you enough about Mondi’s “Sustainable by Design” initiative, which includes industry-leading recyclable and efficient packaging, like size-adjustable boxes for e-commerce. No more, box-as-big-as-your-table for a single book if Mondi can help it. There seems to be a genuine push to embed sustainability into the corporate culture, with a ten-year sustainability plan recently launched.

A focus on sustainable packaging also makes good business sense – it’s what consumers want. The last year wasn’t kind to Mondi, as the pandemic knocked 8% off revenue, and underlying cash profit fell 18% to €1.4bn. Lower pricing and adverse currency movements, coupled with high fixed costs, took their toll.

Longer term, we think Mondi’s in a good spot. It should benefit from the increased demand for e-commerce packaging, and it has high exposure to emerging markets. Looking at the last full year’s numbers, just under half of revenue, based on the location of production, comes from outside western Europe and North America. That increases risk in the short term, but could be an exciting growth opportunity.

Mondi Geographies

Source: Refinitiv Eikon, to 31/12/2020

Coupled with the focus on sustainability, we think Mondi’s carved out a great commercial position. Wider economic uncertainty persists though. So we can’t rule out ups and downs. The price to earnings ratio of 13.4 is a little higher than the ten-year average of 12.6.

Mondi share price, charts and research

Visa – carbon intensity 5.3

Visa is the world’s biggest payment processor. It processed 140.8bn transactions in 2020 – a responsibility that large means it must have its head screwed on straight when it comes to corporate responsibility.

The pandemic’s triggered an increase in ecommerce activity, so it’s reasonable to think card transaction will increase. Good governance is crucial given the ever increasing regulatory risk that Visa will want to be on the right side of, if and when it’s implemented.

Reassuringly, some rating bodies give Visa the highest rating among its peers for “cybersecurity maturity”. About 800 people, or 5% of Visa’s workforce, work in Cybersecurity. The group also plays a substantial role in helping to prevent and identify fraud on a global scale. This has led to a number of improvements, including improved authentication processes. It’s also opened another revenue stream by offering fraud prevention services as a product.

Away from the rulebooks and ethics, Visa has an admirable operating model. Because it’s not a credit card company, it’s not on the hook for payments – it simply facilitates them. And growing volumes doesn’t come with too much extra cost. Operating margins are over 66%, some way above peers. That means profits are of a high quality, and a higher proportion turns into cash, which can then be returned to shareholders. Remember no dividend is ever guaranteed.

The group also seems to have done a good job clearing the hurdles the pandemic churned up, including fewer cross-border transactions – which are starting to bounce back after a near-collapse.

Ultimately, we think Visa has exciting growth opportunities, and admire its operating model. There are risks of increased regulation, and the effect of any security or technological failures could be severe, especially with a price to earnings ratio of 30.7. Investors need to take a long-term view.

Visa share price, charts and research

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InterContinental Hotels Group – carbon intensity 6510.7

Intercontinental Hotel Group has just under 6,000 hotels and a whopping 886,000+ hotel rooms under its umbrella. An estate of that size obviously comes with a huge amount of ESG responsibility.

The hotel sector accounts for around 1% of global carbon emissions, and IHG has various initiatives in place to limit its impact. It’s targeting a 15% absolute reduction in carbon emissions from its direct operations, and a 46% fall per square metre in its franchised units, by 2030. It’s also eliminating single use items, and a “prevent, donate, divert” initiative aims to cut down on food waste.

These efforts are particularly important when you consider IHG’s presence in over 100 countries means it’s operating in some of the world’s less prosperous regions.

As it emerges from the Covid crisis, there’s a lot of work to be done. International travel restrictions hammered the business last year, and the group is now saddled with a debt pile which is a huge 10.4 times expected earnings. The focus, rightly, in the medium term will be on bringing that number down.

IHG net debt to cash profit (EBITDA) ratio

Source: Refinitiv Eikon, to 01/10/2021

A capital light model – because the vast majority of hotels are franchised, not owned – is a serious benefit though. And the group’s famous brands, including Holiday Inn and the swankier InterContinental and Crowne Plaza hotels, means it should be well placed to capture demand as normal life swings back around. There are of course no guarantees for how long that will take though.

IHG share price, charts and research

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All carbon intensity scores have been calculated using data from Refinitiv Eikon. All scores use pre-pandemic 2019 data, apart from Reckitt Benckiser which uses data from 2018.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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